Johannesburg, 21 September 2018 — 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 2019.
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 risk adjusted capitalisation registered at very strong levels over the last two years, on the back of a dilution in asset risk exposure, which was further supported by a reduction in underwriting risk (given premium contractions recorded over the same period). While asset risk is likely to remain at a moderate level relative 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 over the rating horizon, further moderated by a reduction in capital following a material dividend payment. Maximum net deductibles are viewed to be limited to very conservative levels relative to capital, while the reinsurance panel reflects strong aggregated counterparty credit strength.
Key liquidity metrics, including government securities, remained at strengthened levels over the last three years, supported by sound operating cash flow generation, and conservative asset allocation. In this regard, cash covered net technical liabilities by 1.1x at FY17 (FY16: 0.9x; FY15: 0.8x), while claims cash coverage registered at 24 months (FY16: 17 months). While banking counterparty diversification improved in FY17, the aggregated credit strength remained moderately strong (with the top two banks reflecting a strong level of credit strength). Healthy operational cash flow generation and balanced asset allocation are likely to sustain liquidity metrics within a strong range over the rating horizon.
The business profile is intermediate, supported by healthy competitive positioning, partially offsetting earnings concentration. In this respect, the insurer remained among the top tier players, albeit accounting for a relatively lower 7% of short term insurance industry gross premiums in FY17 (review period average: 8%), while earnings remained concentrated to two lines of business (which thus far have run at elevated loss ratios). Management expects to improve the business profile by strengthening competitive positioning and earnings primarily through a more diversified distribution strategy, enhanced product development and market segment diversification.
Earnings capacity is intermediate, reflecting the impact of limited underwriting profitability (albeit contained within a relatively stable range) on sizeable investment income. In this respect, the five year underwriting margin equated to -4% (FY17: -5%; FY16: -5%), while the return on revenue averaged 13% over the review period. This trend is expected to persist over the outlook horizon, with a sustainable turnaround in underwriting performance remaining a key rating consideration.
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 register within strong ranges. Conversely, risk adjusted capitalisation registering below expectations may result in negative rating pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2007)|
|Claims paying ability: A(KE)|
|Last rating (September 2017)|
|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 May 2018
APA rating reports, 2007-2017
Kenya Short Term Insurance Industry Bulletins, 2014-2017
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.
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 2017
- Unaudited interim results to 30 June 2018
- Budgeted financial statements for 2018
- Financial Condition Report 2017
- The current year reinsurance cover notes
- Other relevant company specific information
The rating above was solicited by, or on behalf of, the rated entity, 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.|
|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, usually spanning a time horizon of twelve to eighteen months.|
|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.