Johannesburg, 29 September 2017 — 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 2018.
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’s key liquidity metrics strengthened over the last two years, supported by sound operating cash flow generation, with funds generated placed in government securities. In this regard, cash covered net technical liabilities by 0.9x at FY16 (FY15: 0.8x), while claims cash coverage registered at 17 months (FY15: 18 months). Healthy operational cash flow generation, conservative dividend distributions, and balanced asset allocation are likely to sustain liquidity metrics within a strong range over the outlook horizon.
Furthermore, risk adjusted capitalisation improved, on the back of the dilution in asset risk exposure, which was further supported by a reduction in underwriting risk (given premium contractions recorded in FY16). While asset risk is likely to remain at a moderate level relatively to capital (given the increased focus on government securities), insurance risk may increase over the medium term, following growth and diversification efforts. As such, GCR expects risk adjusted capitalisation to register within a strong range (versus the very strong level in FY16), supported by sound internal capital generation, in tandem with well contained dividend distributions.
APA remained among the top tier players, albeit accounting for a relatively lower 7% of short term insurance industry gross premiums in FY16 (FY15: 8%; review average: 8%). 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.
Earnings capacity is intermediate, underpinned by limited underwriting profitability (albeit contained within a relatively stable range), offsetting sizeable investment income. In this respect, the five year underwriting margin equated to -3% (FY16: -5%; FY15: -2%), while the return on revenue averaged 14% over the review period. This trend is expected to persist over the outlook horizon, with a sustainable turnaround in underwriting profitability remaining a key rating consideration.
Earnings remained 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, maximum net deductibles are viewed to be very conservative, relative to capital.
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, a sustained deterioration in net profitability, may also be negatively viewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2007)|
|Claims paying ability: A(KE)|
|Last rating (September 2016)|
|Claims paying ability: A(KE)|
|Sector Head: Insurance Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
APA rating reports, 2007-2016
Kenya Short Term Insurance Industry Bulletins, 2014-2016
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:
- The audited financial results as at 31 December 2016
- Unaudited interim results to 30 June 2017
- Budgeted financial statements for 2017
- Financial Condition Report 2016
- The current year reinsurance cover notes
- Other relevant company specific information
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
|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”)|
|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 more detailed glossary of terms please click here
GCR affirms APA Insurance Limited’s rating of A(KE); Outlook Stable.