GCR has maintained Apollo Life Assurance Limited’s (“Apollo”) national financial strength rating at BBB+(KE) (triple B plus), which expires in August 2013. The rating outlook was, however, changed from “Positive” to “Rating watch”, which necessitates a review of the company’s performance within 3 months.
The outlook is a reflection of the marked decline in shareholder funds in F11 (owing to significant fair value investment losses and a sizeable dividend payment). Of further concern was the decline in coverage of actuarial liabilities (from 7.8x in F10 to 3.3x in F11), as well as the subdued level of assets backing life operations, which covered the life fund by a relatively low 1.1x at year-end F11 (F10: 1x). The above has been a direct result of the assurer’s aggressive investment strategy, which GCR would expect to see revised in the short to medium term. In order to support operations, the company intends undertaking a rights issue by year-end F12.
Factors providing support to the rating include the brand leverage derived from the Apollo Group (which benefits from the recent introduction of a reputable private equity fund as a minority shareholder), and the favourable operating performance exhibited of late (with consecutive surpluses registered over the past three years). The increasing prominence of low risk cash investments in the investment portfolio was favourably viewed, albeit the exposure to listed equities remains elevated.
With the rating placed on “Rating watch”, an upgrade of the rating is considered unlikely in the short term. Over the medium to long term, an upward adjustment of the rating is dependent on a sustained strong growth trajectory, a reduced degree of earnings volatility and/or the adoption of a comprehensive capital management strategy, which facilitates appropriate asset-liability matching. Conversely, failure to raise the required share capital to ensure capitalisation reverts to the level supportive of the current rating may result in a rating revision. Further, a decline in coverage of invested assets backing life operations over policyholder liabilities below 1x may trigger a rating downgrade.
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