Kenya Re’s outlook drops to negative over tight capital

Mr Jadiah Mwarania, Kenya-Re managing director. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

By DAVID HERBLING

In Summary

• Kenya Re managing director Jadiah Mwarania said he concurs with the issues raised by the credit agency.
• The State-backed reinsurer posted half-year net profit of Sh1.56 billion as at June 2016, a growth of 4.1 per cent compared to the previous year.
• Investment income grew by a fifth to hit Sh1.72 billion in the period under review, growing faster than underwriting income.

Ratings agency A.M. Best has revised Kenya Re’s outlook to negative from stable citing requirement for more capital and dependence on investment earnings.

However, the New Jersey-based credit rating firm affirmed Kenya Re’s financial strength at B+ which means the reinsurer can meet ongoing obligations.

It was also accorded a long-term issuer credit rating of “BBB-”, a mark of ability to pay debts.

“The revised outlooks for Kenya Re’s ratings reflect a downward trend in risk-adjusted capitalisation over recent years, a need to accelerate the development of the enterprise risk management framework and culture, pressures on investment income, and emerging challenges around funding the company’s expansion in its regional markets, should those areas continue to deliver high growth,” A.M. Best said in its latest coverage note.

“Kenya Re’s operating results during the first nine months of 2016 were ahead of those achieved during the same period of 2015, although A.M. Best notes that quarterly results can be volatile.”

Kenya Re managing director Jadiah Mwarania said he concurs with the issues raised by the credit agency.

“At our rate of growth, we require more capital. We already have an asset-liability matching policy,” Mr Mwarania said in an interview with the Business Daily.

The State-backed reinsurer posted half-year net profit of Sh1.56 billion as at June 2016, a growth of 4.1 per cent compared to the previous year.

Investment income grew by a fifth to hit Sh1.72 billion in the period under review, growing faster than underwriting income.

“Reinsurers mostly make money from investments because we must invest the premiums,” said Mr Mwarania.

A.M. Best said it expects Kenya Re to continue making good profits over the medium term, supported by mandatory cessions in Kenya’s market, whilst investment returns, which have been exceptionally high in recent years, may come under downward pressure.

Local concessions

Kenya Re’s local concessions, which guarantees the firm 20 per cent of Kenya’s re-insurance premiums, was renewed last year for a further five-year period.

It expects more profit from concessions arising from covering the multibillion marine insurance.

From January 1 this year, or goods imported into Kenya must be underwritten locally.

These local concessions make up a third or 35 per cent of the firm’s business, and the MD expressed confidence that they will continue to be in place just like in other markets which protect their reinsurance companies.

The US agency called on Kenya Re to roll out a risk management software to match the growing scale and complexity of the company’s risk environment, and to be more aligned with best practice.

Kenya Re last year set up a subsidiary in Zambia with an eye on the southern Africa market, being the second after the Abidjan office that opened in May 2014 and targets French-speaking West Africa.

Kenya Re is 60 per cent controlled by the National Treasury. The balance is floated at the Nairobi Stock Exchange.

It has been one of the best performing stocks in the insurance segment of the market where most firms have issued profit warnings in the last two years.

hdavid@ke.nationmedia.com