By: A.M. Best
A.M. Best has downgraded the Financial Strength Rating to B (Fair) from B+ (Good) and the Long-Term Issuer Rating to bb+ from bbb- of Kenya Reinsurance Corporation Limited (Kenya Re) (Kenya). The outlook of these Credit Ratings (ratings) has been revised to stable from negative.
The ratings reflect Kenya Re’s balance sheet strength, which A.M. Best categorises as very strong, as well as its adequate operating performance, neutral business profile and weak enterprise risk management (ERM).
The rating actions are the result of A.M. Best’s concerns over the effectiveness of Kenya Re’s ERM in the face of expected business growth and increasingly sophisticated competition. Additionally, there are uncertainties related to the company’s ability to grow its capital resources at the same rate that it increases its revenue over the longer term.
Kenya Re’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), is consistent with a strongest assessment; however, offsetting balance sheet strength factors include uncertainties related to the company’s natural catastrophe exposure and the financial system risk associated with Kenya’s financial markets. Although A.M. Best expects risk-adjusted capitalisation to remain at the strongest level over the longer term, the company is expected to face challenges in funding its expansion in its regional markets, should those markets continue to deliver high growth. The ability to generate and retain robust earnings has supported the company’s balance sheet over recent years. The company has delivered an average return on capital and surplus of 15.9 percent over the five years to December 2016, considerably ahead of average inflation, which has been in the region of 7% per annum. Investment return is the primary contributor to profit, whilst the average combined ratio over the period was 97.5%. Investment returns are expected to trend lower compared with recent years.
Kenya Re’s business profile benefits from a very strong market position in Kenya where the company enjoys mandatory cessions of 20% and generates in the region of 57% of its gross written premium. However, this is offset by a significantly weaker competitive market position elsewhere. A.M. Best assesses the company’s analytical capabilities to be limited, and management effectiveness to be untested in light of the significance of mandatory cessions. Kenya Re’s ERM is developing from a low base, and A.M. Best believes that the risk management function’s ability to evaluate measures relevant to financial strength and performance, generate corporate actions, and influence management decisions is weak.