Cannon Assurance earns negative outlook rating after drop in profit

Cannon Assurance’s future outlook has been downgraded from stable to negative after profit drop and capital shrinkage.

South African rating agency GCR assigned the negative grade to the insurer but retained BBB+ rate on its ability to settle claims.

Cannon Assurance was 75 per cent acquired by South African Metropolitan and Momentum International (MMI Holdings) in February at an estimated Sh2.4 billion.

READ: SA firm gets green light for Sh2.4bn Cannon Assurance deal

“Cannon’s rating has been placed on negative outlook, owing to the combined impact of reduced capitalisation and profitability, coupled with sustained liquidity limitations,” said GCR in the rating report.

Cannon’s capital reduced to Sh723 million at the end of last year from Sh1.4 billion in 2013 following disposal of investment properties through an in-kind dividend of Sh781 million.

The transaction which did not generate a cash inflow slashed the insurer’s solvency margins.

The insurer has recorded negative underwriting margins over the past two years, with GCR noting a further deficit budgeted for 2015.

In the six months to June though Cannon had an underwriting profit of Sh99 million, according to Insurance Regulatory Authority, an improvement from a previous loss of Sh70 million and an operating profit of Sh153 million.

The company offers a comprehensive suite of life and general insurance, and asset management solutions for both retail and corporate clients. It also offers Sharia compliant insurance covers.

The firm has a wide footprint in Kenya with offices in Mombasa, Nairobi, Nakuru, Nyeri and Thika. Cannon controls one per cent of the country’s general insurance business and 0.26 per cent life business.

Entry of MMI in the company is expected to give it financial muscle to fight for a larger market share.

The South African insurance has indicated interest to acquire additional shareholding in Canon Insurance. MMI also owns a majority stake in Metropolitan Insurance.
MMI has set aside Sh1 billion to acquire any stake put up for sale in any of the subsidiaries.

“Cannon’s rating also potentially stands to benefit from the incorporation of MMI into the shareholding structure over the short to medium term,” said GCR.

The rating could however be downgraded further if the insurer’s weakened profit trend persist.

Cannon becomes the second insurer rated recently to receive a negative outlook rating from GCR, after Fidelity Shield Insurance.

Insurance firms are expected to seek credit rating with regulations proposing they hold capital as per their credit rating with those not rated holding the higher amounts.

SOURCE: BUSINESS DAILY