Johannesburg, 13 November 2018 — Global Credit Ratings has today affirmed the national scale financial strength rating assigned to APA Life Assurance Limited of BBB(KE), with the outlook accorded as Negative. GCR has simultaneously withdrawn the rating.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to APA Life Assurance Limited (“APA Life”) based on the following key factors:
The Negative outlook reflects the potential for continued strain on APA Life’s credit profile stemming from persistent earnings pressure due to limited scale. APA Life’s earnings capacity remained weak during the review period registering cumulative deficits of KES294m (FY17: KES26m loss). GCR notes the potential for earnings capacity to remain under pressure, given the uncertain interplay of early stage earnings remedies and challenging market dynamics in key portfolios, coupled with continued expense strain on the limited individual life book. In this regard, management’s ability to demonstrate a sustainable turnaround in earnings capacity remains a key rating consideration.
APA Life’s risk adjusted capitalisation registered slightly above the statutory minimum at FY17, supported by a capital injection of KES100m. Note is taken of the additional KES150m capital pledge from the group, which may support minimum statutory capital requirements. While capital generation from operations remained negative in FY17, positive results from balance sheet de-risking supported an improvement in asset quality and asset liability matching. Management has indicated advanced plans to liquidate additional risky assets by end-FY18, which could consolidate risk adjusted capitalisation within an intermediate range (should sustainable capital generation from operations follow on).
An assortment of conservative investment actions headlined by the disposal of equities and high preference for government paper underpins the insurer’s sound asset liability matching. A laddered portfolio of government securities accounted for a higher 85% (FY16: 78%) of the investment portfolio, while total investments covered net technical liabilities by a stable 1.1x at FY17, concurrently redressing the negative yield gap. Going forward, asset liability matching could strengthen on further disposals of low-yielding investment assets.
The insurer displays a limited business profile, given a developing market profile and high product concentration. Revenue market share remained low at a stable 1.8% in FY17, with a moderate share of 5% of industry group life business diluted by very low participation on other products. In this regard, the insurer’s earnings profile is centred on group life (88% of GWP), with slower than anticipated growth in individual life impeding prospects for gross premium diversification. In this respect, the business profile is expected to remain limited over the rating horizon.
Nonetheless, exposure to high value risks is protected by reinsurance at very conservative deductibles relative to earnings and capital, while counterparties on the panel exhibit strong aggregate strength.
The rating withdrawal was due to business reasons. Accordingly, GCR will no longer provide ratings or analytical coverage for APA Life.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2009)|
|Financial strength: A-(KE)|
|Last rating (October 2017)|
|Financial strength: BBB(KE)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance Companies, updated May 2018
APA Life Assurance Company Limited report, 2009-2017
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 Life Assurance 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 Life Assurance Limited.
The information received from APA Life Assurance Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2017
- Four years prior audited financial statements
- Unaudited interim results to 30 June 2018
- Budgeted financial statements for 2018
- Actuarial valuation statement for 2017
- Financial condition report for 2017
- The current year reinsurance cover notes
- Other non-public statistical 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
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|International Scale Rating LC||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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|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|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.|
|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.|
For a detailed glossary of terms please click here
GCR affirms APA Life Assurance Limited’s rating at BBB(KE); Outlook Negative.