GCR affirms Occidental Insurance Company Limited’s rating of A-(KE); Outlook Negative.

11 Dec 2018 In Rating Notifications

GCR affirms Occidental Insurance Company Limited’s rating of A-(KE); Outlook Negative.

Johannesburg, 11 December 2018 - Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Occidental Insurance Company Limited of A-(KE), with the outlook accorded as Negative. The rating is valid until December 2019.

 

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Occidental Insurance Company Limited (“OIC Kenya”) based on the following key factors:

OIC Kenya’s rating has been placed on negative outlook following a deterioration in earnings capacity over the last two years. Earnings moderation was triggered by a spike in claims in FY16, and more recently by an escalation in the operating cost base attributed to branch expansion expenses. Resultantly, the two-year average underwriting margin equated to
-5% (prior three-years: 6%), while the operating margin averaged 8% (prior three-year average: 21%). GCR notes the potential for weakened earnings capacity to persist due to elevated claims, a higher operating cost base, and subdued premium growth, which could adversely impact on other credit protection metrics.

Risk adjusted capitalisation moderated to a strong level from very strong levels recorded historically, underpinned by an increase in insurance risk following significant premium volume expansion in FY17. Accordingly, the international solvency margin lowered to 58% at FY17 (FY16: 76%), while the statutory Capital Adequacy Ratio (“CAR”) equated to 96% (FY16: 157%). GCR expects risk adjusted capitalisation to remain strong over the rating horizon, although noting potential dilution in the event of sustained underwriting pressure. Furthermore, a shortfall in statutory solvency relative to the regulatory minimum requirement may negatively impact the entity’s credit profile should this result in regulatory action.

Liquidity metrics remained strong, as evidenced by high claims cash cover of 15 months and moderately strong net technical provision coverage of 0.7x at FY17 (FY16: 20 months and 0.8x respectively). Liquidity metrics are projected to continue to measure within a strong range over the rating horizon, supported by a conservative asset allocation strategy.

Despite exhibiting an elevated degree of revenue concentration around the motor line at both gross and net level, OIC Kenya’s earnings profile manifests a fair level of premium diversity, with two other lines of business contributing materially to the gross premium base. This is, however, partially offset by an intermediate, albeit gradually improving competitive position following substantial premium volume expansion in FY17. Medium term competitive position is expected to be supported by enhanced focus on the retail segment, and increasing brand visibility and regional presence.

The reinsurance panel reflects a sound aggregate level of credit strength, although maximum net deductibles are viewed to be moderately high relative to capital.

The rating is sensitive to persistent underwriting pressure and a weakening in risk adjusted capitalisation. However, a sustained turnaround in earnings capacity may result in the rating outlook reverting to Stable.

 

NATIONAL SCALE RATINGS HISTORY

   
Initial rating (March 2017)    
Claims paying ability: A-(KE)    

Outlook: Stable

   
Last rating (December 2017)    
Claims paying ability: A-(KE)    

Outlook: Stable

   

 

 

ANALYTICAL CONTACTS

Primary Analyst      
Tichaona Nyakudya      
Credit Analyst      
(011) 784-1771      
.(JavaScript must be enabled to view this email address)      

Committee Chairperson

     
Susan Hawthorne      
Senior Credit Analyst      
(011) 784-1771      
.(JavaScript must be enabled to view this email address)      

 

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated May 2018

Kenya Short Term Insurance Industry Bulletins, 2014-2017

OIC Kenya rating reports, 2017

 

RATING LIMITATIONS AND DISCLAIMERS

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. 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.

 

SALIENT FEATURES OF ACCORDED RATING

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 the rated entity, 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.

Occidental 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 Occidental Insurance Company Limited.

The information received from Occidental Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2017
  • Four years of comparative audited financial statements
  • Unaudited interim results as at 30 September 2018
  • Budgeted financial statements for 2018
  • The current year reinsurance cover notes
  • Statutory returns to 31 December 2017
  • Financial Condition Report 2017, and
  • Other related documents.

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.

 

 

 

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.
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.
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.
Distribution Channel The method utilised by the insurance company to sell its products to policyholders.
Enterprise Risk Management ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.
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.
International Scale Rating (“ISR”) 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.
Intermediary A third party in the sale and administration of insurance products.
Interest Money paid for the use of money.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
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.
Policyholder The person in actual possession of an insurance policy.
Portfolio All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
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.
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.
Statutory Required by or having to do with law or statute.
Subordinated Debt Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.
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.
   

For a more detailed glossary of terms please click here.

 

 

 

 

 

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