Credit Rating Action
Johannesburg, 05 May 2022 – GCR Ratings (“GCR”) has affirmed Professional Insurance Corporation Zambia PLC’s (“PICZ”) national scale financial strength rating of A+(ZM), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Professional Insurance Corporation Zambia PLC||Financial strength||National||A+(ZM)||Stable Outlook|
PICZ’s rating reflects the insurer’s sound business profile, supported by a strong competitive position with moderation from limited premium diversification. The financial profile remains solid, reflecting healthy earnings and capitalisation while liquidity remains within intermediate levels.
The insurer’s business profile remains sound supported by a strong competitive position and constant growth in market share. In this regard, the insurer has maintained its position as the market leader in the Zambian short-term insurance industry, with its share of industry gross premiums growing to 29% in FY21, from 21% in FY16, while relative market share registered at approximately 5x the industry average. The strong competitive position is expected to be sustained by the insurer’s strong franchise strength and growth initiatives as it gains business from less franchised players. Premium diversification is however limited, with significant concentration to two business lines, fire and motor, though in line with market norms. Geographic diversification is inherently limited as the insurer is licensed to only operate in the domestic market. Single name concentration is a notable credit negative, with the largest and top five clients accounting for 30% and 55% of gross premiums respectively in FY21.
The insurer has a moderately strong earnings profile, with the underwriting margin registering at 9.9% from 4.1% in FY20. This was mainly driven by improved economic conditions as well as cost management (benefiting from increased scale), with the operating expense ratio measuring at 46.1% in FY21 from 52.3% in FY20. However, the claims experience remained high registering at 52.0% (FY20: 49.2%). The impact of higher claims on net profitability was cushioned by stronger investment income, with the investment yield increasing to 19.3% from 16.4% in FY20 as the insurer adjusted the investment portfolio towards higher yielding government bonds. GCR expects earnings metrics to be maintained at similar levels over the outlook horizon, with the comparatively elevated claims experience likely to continue posing risk to the insurer’s earnings growth potential.
Capitalisation remained strong, with the GCR capital adequacy ratio (“CAR”) registering at 1.7x (FY20: 1.8x) supported by sound internal capital generation. There is, however, pressure on risk adjusted capital arising from the combination of strong premium growth and an upward drift in retention on the motor book. Nonetheless, the GCR CAR is expected to remain above 1.5x over the outlook horizon under a stressed dividend scenario.
The liquidity position remains within the intermediate range. Cash and stressed financial asset coverage of net technical liabilities registered at 1.5x, and coverage of operational cash flow requirements equated to around 6.4 months. The slight reduction was due to the reallocation from short term deposits to higher portfolio weights of 28.7% (FY20: 11.3%) and 22.6% (FY20: 16.3%) in government bonds and higher yielding Treasury bills, respectively. Liquidity is expected to register at similar levels over the outlook horizon, albeit sensitive to dividend distributions and reserving risk.
The Stable Outlook reflects expectations that the insurer’s competitive position will be sustained at strong levels, while the business mix is not expected to change materially over the outlook horizon. Earnings are expected to remain strong and continue to support risk adjusted capitalisation and liquidity at rating sufficient levels, with the GCR CAR expected to be maintained above 1.5x and coverage of net technical liabilities at around 1.5x.
Positive rating action could follow a sustained strengthening in earnings that concurrently reduces risks to credit protection metrics. Downward rating pressure may arise from increased pressure on capitalisation and liquidity as well as increased exposure to related parties.
|Primary analyst||Victor Matsilele||Analyst: Insurance Ratings|
|Johannesburg, ZA||VictorM@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, January 2022|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, December 2021|
|GCR Insurance Sector Risk Scores, March 2022|
Professional Insurance Corporation Zambia PLC
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(ZM)||Stable Outlook||June 2010|
|Financial Strength||Last||National||A+(ZM)||Stable Outlook||June 2021|
Risk Score Summary
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated party. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2021;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2022;
- Unaudited interim results to 31 March 2022;
- Reinsurance cover notes; and
- Other relevant documents.