Announcements

GCR affirms APA Insurance Limited’s rating of A(KE); Outlook Stable.

Johannesburg, 13 Oct 2015 — 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 is valid until September 2016.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to APA Insurance Limited (“APA”) based on the following key criteria:

APA reflects a moderately strong competitive position, underpinned by a comparatively high market share (FY14: 7.7%). In this regard, the insurer remained the fourth largest player in the Kenyan short term insurance market. Enhanced market share has been targeted going forward, primarily through a more diversified distribution strategy.

APA’s capital adequacy has improved over the last three years, with the strengthened international solvency margin (FY14: 78%; BY15: 68%) stemming largely from higher profitability. Going forward, the international solvency margin is expected to be maintained within a range of 60% to 70%, with capital adequacy viewed to be intermediate (taking into account high market risk exposure).

Liquidity metrics have strengthened relative to the start of the review period. Total investments covered net technical provisions by a higher 1.4x in FY14 (FY11: 1.1x), while the insurer has opted to retain increasing proportions of operational cash flows in liquid form over the past two years. GCR expects liquidity to be maintained at a moderately strong level going forward. Asset quality is intermediate, with improvements stemming from the more conservative investment strategy adopted over the past three years. APA nevertheless continues to carry high market risk relative to peers, with listed equity exposure corresponding to 54% of FYE14 capital. Going forward, asset quality is expected to be maintained at the current intermediate level.

APA’s earnings capacity is a function of its sizeable investment portfolio (FY14: KES9.5bn), which generates a large quantum of investment income in absolute terms. Accordingly, despite the weak (albeit fairly consistent) negative underwriting margins registered throughout the review period, large realised investment returns have translated into solid returns on revenue over the past two years. This trend is expected to persist going forward, although high market risk exposure gives rise to potential profit volatility.

Earnings remain concentrated in two lines of business (motor and medical), which thus far have run at elevated loss ratios relative to peer group statistics. The impact of these lines on earnings pressure is expected to persist pending a raising of rates and tightening of claims cost controls.

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.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (May 2007)    
Claims paying ability: A(KE)    
Outlook: Positive    
     
Last rating (September 2014)    
Claims paying ability: A(KE)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Marc Chadwick   Sheri Few
Sector Head: Insurance Ratings   Senior Credit Analyst
(011) 784-1771   (011) 784-1771
chadwick@globalratings.net   few@globalratings.net
     
Secondary Analyst    
Rodwell Chevure    
Junior Credit Analyst    
(011) 784-1771    
rodwellc@globalratings.net    
     

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies, updated July 2015

APA rating reports, 2007-2014

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Actuarial Having to do with insurance mathematics.
Assets The items on the balance sheet of the insurer which show the book value of property owned.
Assurance Terminology used to describe life insurance.
Balance Sheet An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.
Bond A certificate issued by a government or corporation as evidence of a debt.
Capacity The largest amount of insurance or reinsurance available from a company.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.
Coverage The scope of the protection provided under a contract of insurance.
Insurance A formal social device for reducing risk by transferring the risks of several individual entities to an insurer.
Insured A person or organisation covered by an insurance policy, including the “named insured” and any other parties for whom protection is provided under the policy terms.
Insurer The party to the insurance contract whom promises to pay losses or benefits.
Interest Money paid for the use of money.
Liquidity The ability of an insurer to convert its assets into cash to pay claims if necessary.
Loss The happening of the event for which insurance pays.
Long term (“LT”) Not current; ordinarily more than one year.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.
Policyholder The person in actual possession of an insurance policy.
Portfolio All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. Also, the total securities owned by an insurer.
Provision A part (clause, sentence, paragraph, etc.) of an insurance contract that describes or explains a feature, benefit, condition, requirement, etc. of the insurance protection afforded by the contract.
Rate The pricing factor upon which the insurance buyer’s premium is based.
Rating The statistical process by which insurers determine risks and pricing for the basic classes of insurance.
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.
Retention The net amount of risk the ceding company keeps for its own account
Risk Uncertainty as to the outcome of an event when two or more possibilities exist.
Securities Evidences of a debt or of ownership, such as stocks, bonds, and checks.
Solvency With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.
Statutory Required by or having to do with law or statute.
Surplus The excess of assets over liabilities.
Valuation Estimation of the value of an item, usually by appraisal.

For a detailed glossary of terms utilised in this announcement please click here

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;

  • Audited financial results of Company as at 31 December 2014
  • Four years prior audited financial statements
  • Unaudited interim results as per 31 March 2015
  • Budgeted financial statements for 2015
  • Insurance Liability valuation statement for 2014
  • Financial Condition Report 2014
  • The current year reinsurance/retrocession cover notes
  • Other non-public statistical information

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.

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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