Nairobi, 1 December 2020 – GCR Ratings (“GCR”) has affirmed APA Insurance Limited’s (“APA”) national scale financial strength rating of A(KE), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|APA Insurance Limited||Financial strength||National||A(KE)||Stable Outlook|
APA’s national scale financial strength rating reflects the strengths and weaknesses of consolidated Apollo Investments Limited Group (“the group”). APA is the core operating entity of the group, contributing 88% and 57% of annual gross premiums and assets at FY19, respectively. The rating is anchored by strong risk adjusted capitalisation, balancing intermediate liquidity and earnings. Furthermore, the business profile is considered to be intermediate, with moderately strong competitive position partially offset by limited product diversification.
Risk adjusted capitalisation is assessed as strong, underpinned by consistent internal capital generation and a conservative dividend policy, offsetting the increase in market risk ascribed to an increase in non-cash investments. As such, the group’s GCR capital adequacy ratio (“CAR”) was sustained at 2.3x, with APA also displaying sound capitalisation given a statutory solvency margin of 239% at FY19 (FY18: 212%), measuring above the prescribed regulatory requirement of 200%. GCR expects a slight improvement in risk adjusted capitalisation over the medium term, driven by prospects of sustained earnings generation and retention.
The group displays intermediate earnings capacity, a function of sound investment income offsetting unfavourable claims experience from the core operating entity and the Ugandan subsidiary. As such, the five-year operating margin and return on revenue was sustained at 11%, whereas APA’s five-year average underwriting profitability moderated to -4% (FY19: -5%; FY18: -3%), while the return on revenue also moderated to 9% (FY19; 9%). GCR expects operating and underwriting profitability to be sustained over the medium term, with the group and APA expected to attain rolling five-year average operating and underwriting margins of around 12% and -4% respectively.
Liquidity is viewed to be intermediate, with cash and stressed financial assets coverage of net technical obligations slightly improving to around 1.5x at FY19 (FY18: 1.4x), driven by a slight reduction in short-term obligations. Coverage of operational cash requirements was sustained at 22 months. GCR expects liquidity metrics to be maintained at similar levels over the rating horizon.
The business profile is considered to be intermediate, with moderately strong competitive position partially offset by limited product diversification. In this respect, the group’s weighted market share and relative market share measured at 6.4% and 2.4x (FY18: 6.7% and 2.5x) respectively, with the core operating entity controlling corresponding metrics of 7.1% and 2.6x (FY18: 7.4% and 2.8x). The business mix is viewed to be concentrated, with two lines of business contributing materially to revenue. GCR expects the business profile to be maintained within an intermediate range over the medium term.
The Stable Outlook reflects expectations of the credit profile being maintained, with the GCR CAR anticipated to register between 2x – 2.5x over the medium term. Liquidity and earnings metrics are expected to be sustained within an intermediate range, restrained by the current business profile.
Positive rating action may result from a demonstrated improvement in earnings and liquidity metrics while other credit protection metrics remain at similar levels. Conversely, downward rating action may follow should earnings deteriorate below expectations.
|Primary analyst||David Mungai Mburu||Analyst: Insurance Ratings|
|Nairobi, KE||DavidM@GCRratings.com||+254 20 367 3618|
|Secondary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SylviaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, November 2020|
|GCR Insurance Sector Risk Scores, July 2020|
APA Insurance Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A(KE)||Positive||May 2007|
|Financial strength||Last||National||A(KE)||Stable||October 2019|
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||4.00|
|Sector risk score||4.25|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Reinsurance||The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Short Term||Current; ordinarily less than one year.|
|Underwriting||The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the entities and other reliable third parties to accord the credit rating included:
- Draft financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 31 July 2020; and
- Other relevant documents.