AM Best affirms credit ratings of Kenya Reinsurance Corporation Limited
AM Best has affirmed the Financial Strength Rating of B (Fair) and the Long-Term Issuer Credit Rating of “bb+” of Kenya Reinsurance Corporation Limited (Kenya Re) (Kenya). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect Kenya Re’s balance sheet strength, which AM Best categorises as very strong, as well as its adequate operating performance, neutral business profile and weak enterprise risk management.
Kenya Re’s risk-adjusted capitalisation is at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), supported by low underwriting leverage and adequate liquidity. AM Best notes that the company’s BCAR has declined over recent years, chiefly as a result of increasing underwriting and asset risk, which has outpaced capital generation. Offsetting balance sheet strength factors include uncertainties related to the company’s natural catastrophe exposure and therefore the adequacy of catastrophe retrocession cover, as well as the high level of economic, political and financial system risk that is associated with operating in the company’s core markets.
Kenya Re’s adequate operating performance is evidenced by its three-year (2016-2018) weighted average return-on-equity (ROE) of 12%. Performance should be viewed in light of inflation, which has ranged between 8% and 5% over the same period. Underwriting performance deteriorated in 2018, demonstrated by a combined ratio of 105.6%, compared with 95.5% in the prior year. The 2018 result was impacted primarily by an increase of mid-sized losses and unfavorable prior-year reserve development on certain Asian weather events. However, AM Best expects profitability to recover in the near term.
Kenya Re operates as a composite reinsurer across Africa, with a focus on markets in East Africa. The company has privileged market access in Kenya, with compulsory cessions of 20% from its domestic market; however, this is offset by significantly weaker competitive positions elsewhere. The company’s risk management framework is considered to be evolving, and its risk management capabilities are weak when compared with its risk profile. AM Best expects ongoing improvement in risk management to support better underwriting performance in the medium to long term.