GCR has maintained APA Insurance Limited’s (“APA”) national scale claims paying ability rating at A(KE) (single A). The rating outlook, however, was changed from “Stable” to “Negative”. The rating expires in August 2013.
This downward adjustment of the rating outlook follows a notable decline in the international solvency margin to 39% in F11 (F10: 51%), which is projected to deteriorate further to 35% in F12. This constitutes a level below GCR’s minimum requirement for the current rating. The subdued level of capital accumulation displayed over the review period has been a result of persistent underwriting losses (due to an unsustainably high earned loss ratio), as well as heightened volatility in investment earnings (which arises from a sustained high exposure to listed equities).
Some support to the rating was provided by the insurer’s established position in the domestic short term insurance market, which underpinned the recent introduction of a reputable private equity investment fund as a shareholder at group level. Given this entity’s extensive micro-insurance expertise, this is anticipated to result in significant operational synergies and provide a sound framework for future growth. Further, note is taken of the insurer’s recent efforts to de-risk the investment portfolio, which has seen the disposal of select listed equity counters. This has benefited liquidity, which has improved consistently over the past three years to register at an adequate level in F11.
In view of the subdued solvency position (which is forecast to remain constrained in F12), an upward adjustment of the rating is considered unlikely in the short term (in the absence of a capital injection). In the medium to long term, an upgrade remains subject to the insurer registering a positive underwriting result over a sustained period, thereby strengthening capital accumulation and improving solvency metrics. In contrast, the absence of adequate underwriting disciplines (resulting in sustained losses) and/or failure to further improve risk weightings in the investment portfolio could impact adversely on the rating. In this regard, GCR would expect APA to maintain the international solvency margin above 50% to retain the current rating.
CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.
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