Credit Rating Action
Johannesburg, 29 June 2021 – 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|
The rating of PICZ reflects the insurer’s sound business profile, balancing a strong competitive position with limited premium diversification. The financial profile remains solid, reflecting strong capitalisation and intermediate liquidity, despite increased earnings risk from a weakened operating environment characterised by disruptive inflationary pressures.
The business profile remains strong supported by the insurer’s improving competitive position through constant growth in market share. PICZ is the market leader in the Zambian short-term insurance industry, with its share of industry gross premiums growing to 27% in FY20, from 21% in FY16, while relative market share registered at approximately 5x the industry average. PICZ’s competitive position is expected to be sustained by 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. The insurer also has single name concentration, with the largest and top five clients accounting for 30% and 45% of gross premiums respectively in FY20. Geographic diversification is inherently limited by the insurer’s domestic licence.
The insurer’s earnings profile moderated in FY20 as a result of inflationary pressures, which had the impact of increasing costs of repairs, with a weaker Kwacha inflating the cost of imported spares. This was reflected by an underwriting margin of 4,1% at FY20 (FY19: 9%) as claims increased, with the net incurred loss ratio measuring at 49,2% (FY19: 45,8%). The impact of lower underwriting profitability on net profitability was slightly cushioned by stronger investment income, with the investment yield increasing to 16,4% from 13,7% in FY19. Net profitability remained strong, with net return on revenue registering between 11% and 14% in the past four years (FY20:14%; FY19:10.6%). While the earnings assessment factors in a potential recovery in earnings, considering a recovery in interim underwriting margins (1Q F21: 10%) and budgeted metrics aligned with historical trends, the insurer’s ability to manage developing earnings risk is a key rating input over the medium term.
Capitalisation remained strong. The GCR capital adequacy ratio (“CAR”) was maintained at 1.8x at FY20 supported by sound internal capital generation. The GCR CAR is expected to remain above 1.5x over the outlook horizon under a stressed dividend scenario.
The liquidity position is neutral to the rating. Cash and stressed financial asset coverage of net technical liabilities registered at 1.5x, and coverage of operational cash flow requirements equated to around 8.7 months. Allocation of investment assets to liquid assets improved to 68% from 63% in FY19, while the entity also increased its holding of higher yielding government securities and treasury bills to 11% from 4,7% in FY19. 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 recover and continue to support risk adjusted capitalisation and liquidity at rating sufficient levels, with the GCR CAR expected to be maintained above 1.6x and coverage of net technical liabilities at around 1.5x.
Positive rating action could follow an improvement in the liquidity assessment, as well as sustained sound underwriting profitability. Downward rating pressure may arise from lower than expected earnings adversely impacting capitalisation and/ or liquidity.
|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, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2021|
|GCR Insurance Sector Risk Scores, April 2021|
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||October 2020|
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 2020;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2021;
- Unaudited interim results to 31 March 2021;
- Reinsurance cover notes; and
- Other relevant documents.