Johannesburg, 1 Oct 2014 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to APA Insurance Limited of A(KE); with the outlook accorded as Stable. The rating(s) are valid until 09/2015.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to APA Insurance Limited (“APA”) based on the following key criteria:
APA’s business profile continues to reflect a strong competitive positioning, as the 4th largest insurer in the industry. This is partly offset by the high product risk emanating from the insurer’s large motor and medical portfolios (which have historically been loss drivers), coupled with limited product diversification available from the remainder of the portfolio.
The depressed underwriting track record displayed over the review period remains a rating constraint. While APA was able to curtail losses in the previously loss making medical line for the first time in F13, this was off-set by poor results in private motor. Cognisant of this, management will continue to strengthen internal controls in an effort to reverse the negative profit trend. This notwithstanding, execution risk is viewed by GCR to remain high, in light of ongoing pressured competitive dynamics and the need to maintain a disciplined operating strategy.
While GCR acknowledges the efforts made by the company to de-risk its asset base over the review period, the insurer continues to display an intermediate risk position, with capital still highly exposed to potential volatility. To this end, APA’s equity exposure represented 64% of FYE13 capital (F12: 69%), which remains a rating weakness. This notwithstanding, key liquidity metrics have improved consistently over the review period and are considered adequate. While APA displayed strengthened solvency levels in F13 relative to historical norms, solvency is forecast to ease to 56% in F14 (FYE13: 74%), owing to growth strain. Further, GCR notes that the insurer’s risk-adjusted capital ratios are weakened by the sizeable proportion of high risk assets.
APA’s rating could be upgraded if it were to maintain its strong market profile while reporting strengthened risk-adjusted capitalisation and sustained strong underwriting profitability over the medium term. A deterioration in the liquidity profile, an elevation in capital risk deriving from risky investment asset placements or a material decline in key solvency metrics could warrant downward rating action. In addition, the failure of investment income streams to offset a weak underwriting trajectory, or a sustained deterioration on overall profitability, may also be negatively viewed.
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NATIONAL SCALE RATINGS HISTORY
Initial rating (May/2007)
Claims paying ability: A(KE)
Outlook: Positive outlook
Last rating (Sep/2013)
Claims paying ability: A(KE)
Sector Head: Insurance
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies (Updated July 2014)
APA Insurance Limited rating reports 2007-2013
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
APA Insurance Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to APA Insurance Limited with no contestation of the rating.
The information received from APA Insurance Limited and other reliable third parties to accord the credit rating(s) included the latest available audited annual financial statements for 2013 (plus four years of comparative numbers), full year detailed budgeted financial statements for 2014, year to date management accounts to June 2014, the 2014 reinsurance cover notes, the 2013 Financial Condition Report and other non-public statistical information on the company and/or industry.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR affirms APA Insurance Limited’s rating of A(KE); Outlook Stable.