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Oct 17 -
Summary analysis -- African Trade Insurance Agency ---------------- 17-Oct-2012
CREDIT RATING: Country: Kenya
Foreign currency A/Stable/-- Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
17-Apr-2008 --/-- A/--
The ratings on Kenya-domiciled African Trade Insurance Agency (ATI) reflect the company's very strong capitalization, strong financial flexibility, strong liquidity, and the implicit support of the World Bank. Constraints on the rating reflect the under-developed nature of both the company's target African membership and insurance markets.
ATI is very strongly capitalized, following the norms of peer group supranational entities. Standard & Poor's Ratings Services assesses ATI's capital adequacy as extremely strong, with total shareholders' equity at June 30, 2012 of $151 million (28% of gross and 56% of net outstanding underwriting commitments). This is comfortably within ATI's internal underwriting benchmark of net exposures being a maximum of 5x capital and its disbursement benchmark (43% of net exposures and 4% of ceded exposures) of $127 million. Between Dec. 31, 2010 and June 30, 2012, ATI increased paid-up capital to $156 million, from $96 million, through increased subscriptions from existing shareholders. This has further reinforced capital adequacy. Reinsurance support remains considerable, although we do not expect this to exceed 70%.
Standard & Poor's views ATI's financial flexibility as strong, reflecting the key support to member states provided by the International Development Association (IDA; an arm of the World Bank, not rated) and the African Development Bank (AFDB; AAA/Stable/A-1+). The potential for adverse economic conditions in the African region are significant, but are partially offset by ATI's preferred creditor treatment from its member states, and by the terms of the financing of member states' contributions to ATI by the IDA.
ATI has strong liquidity, with total cash and bonds covering 60% of net exposures at June 30, 2012 (2011: 50%; 2010: 61%). Liquidity is supported by ATI's investment policy, which predominantly focuses in strongly-rated or better-quality deposit-holding banks and fixed income instruments that are largely in U.S. dollars.
In our view, the key risks to ATI's profile are the high industry and economic risks in the region in which ATI operates. Nevertheless, the rating impact is mitigated by ATI's key role in supporting intra-regional trade and investment, with the explicit backing by member governments and the lack of a profit imperative in developing ATI as an entity. Also, the explicit support by the World Bank mitigates the impact of these risks.
Business growth is expected to remain strong, in part supported by projects in new member countries that we expect to contribute an additional $100 million in paid-up capital by the end of 2013. We expect the company's business mix to remain focused on political, non-commercial risks with commercial risks being no more than 30% of net exposures. Operating performance is expected to be break-even or better and become a constant feature of ATI's financial profile, supported by investment income.
The outlook is stable. This is supported by ATI's strong financial profile, including very strong capitalization. Negative rating action could result from any wavering of member support in terms of capital raising, provision of liquidity, or loss recoveries. In addition, material capital erosion could also result in a negative rating action. Positive rating action is considered unlikely over the outlook horizon.
Related Criteria And Research
-- Criteria for Multilateral Lending Institutions, Oct. 19, 2007
-- Interactive Ratings Methodology, April 22, 2009
-- Counterparty Credit Ratings And The Credit Framework, April 14, 2004
-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
-- Criteria Update: Factoring Country Risk Into Insurer Financial Strength Ratings, Feb. 11, 2003