Johannesburg, 26 September 2016 — 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 2017.
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 strong competitive position, underpinned by a comparatively high share of short term insurance industry gross premiums (FY15: 8%). In this regard, the insurer is currently the second largest player in the Kenyan short term insurance market. Enhanced market share has been targeted going forward, primarily through a more diversified distribution strategy. GCR expects the insurer to defend its healthy competitive position, underpinned by strong brand recognition and well-diversified distribution channels.
Liquidity metrics remained strong, with the claims cash cover ratio and cash cover of net technical provisions equating to 18 months and 0.8x respectively at FYE15 (FYE14: 16 months and 0.7x). Healthy operational cash flow generation, conservative dividend distribution, and balanced asset allocation are likely to sustain liquidity metrics within a strong range.
The insurer reflects strong capitalisation, underpinned by sound internal capital generation and well contained dividend distributions. In this respect, the international solvency margin equated to 70% at FYE15 (FYE14: 82%), and is expected to remain within a strong range over the rating horizon. Cognisance is taken of moderately elevated market risk exposure. While strong solvency metrics indicate an ability to absorb market losses, sustained depression in market prices may result in the insurer’s capital profile weakening.
APA’s earnings capacity is a function of its sizeable investment portfolio (FYE15: KES10.7bn), which generates a large quantum of investment income in absolute terms. Accordingly, despite the consistently negative (albeit contained within a relatively narrow range) 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 over the review period. Management has taken corrective measures, in line with strategic objectives aimed at improving the earnings profile. The reinsurance panel reflects sound aggregate counterparty credit strength. Further, net maximum deductibles relative to capital are viewed to be very conservative.
Positive rating action may follow a sustainable turn around in underwriting profitability resulting in stronger earnings capacity. This would need to be supported by maintenance of a healthy business profile, while risk adjusted capitalisation and liquidity metrics remain within strong ranges. Conversely, deterioration in the liquidity profile and/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)|
|Last rating (September 2015)|
|Claims paying ability: A(KE)|
|Primary Analyst||Secondary Analyst|
|Yvonne Masiku||Munyaradzi Mushure|
|Senior Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
APA rating reports, 2007-2015
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.
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 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 included:
- Audited financial results as at 31 December 2015
- Four years prior audited financial statements
- Unaudited interim results as per 30 June 2016
- Budgeted financial statements for 2016
- Insurance Liability valuation statement for 2015
- Financial Condition Report 2015
- The current year reinsurance 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 rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms APA Insurance Limited’s rating of A(KE); Outlook Stable.