Johannesburg, 23 Nov 2015 — Global Credit Ratings has affirmed the national scale claims paying ability rating assigned to Professional Insurance Corporation Zambia Plc of A+(ZM), with the outlook accorded as Stable. The rating is valid until November 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Professional Insurance Corporation Zambia Plc (“PICZ”) based on the following key criteria:
The insurer reflects strong risk adjusted capitalisation, underpinned by relatively well contained insurance risks and limited market exposure. Adjusting for low claims reserves, capital adequacy remains within a moderately strong range. Robust internal capital generation, in conjunction with a policy limiting dividend distributions to a maximum of 50% of net profits, is likely to support risk adjusted capitalisation at moderately strong levels over the rating horizon.
PICZ’s competitive positioning remained very strong, representing a core component of the rating. In this regard, the insurer is the leading domestic short term player in the Zambian market, with a five year average market share of 25% of industry gross premiums. Competitive position is supported by a well-entrenched brand and diversified distribution network. As such, GCR expects the insurer’s market share to remain sound going forward, as the expansion strategy and new product development counteract increasing competitive pressures from new entrants.
Earnings capacity remained at robust levels over the review period, underpinned by a competitive claims ratio, offsetting traditionally elevated operating expenses. Cognisance is taken of cost containment measures and increased scale efficiencies, which resulted in an improvement in the operating expense ratio to 39% in FY14 (review period average of 51%). Management expect this trend to persist over the medium term. Sound investment income further enhances the insurer’s net profitability. In GCR’s view, the insurer’s demonstrated track record of profitability is indicative of earnings capacity going forward.
Cash generation has been significantly hampered by the large quantum of balance sheet funding tied up in receivables (FY14: 66%; FY13: 68%). Accordingly, cash represented a relatively constrained portion of the capital base (29%) and the balance sheet (16%). Cash covered net technical liabilities by a higher 1.3x (FYE13: 1.1x), although cognisance is taken of the very low claims reserves. Similarly, operational liquidity measured at intermediate levels, with claims cash coverage equating to 8 months (FY13: 9 months), and total underwriting outflow coverage amounting to 3.3 months.
The reinsurance programme enhances PICZ’s capacity, with maximum net deductibles limited to conservative levels. Comfort is also derived from the sound credit quality of reinsurance counterparties.
Claims reserves remained low in comparison to regional norms, albeit the risk base is heavily skewed towards motor (which is typically associated with a short reserving tail). No actuarial assessments are made to ascertain the adequacy of reserves, although external auditors carry out annual reviews, with periodic on-site inspections conducted by the regulator. As such, GCR would positively view an independent assessment of reserving adequacy.
Motor represents the bulk of the insurer’s risk base (FY14: 78%), albeit supplemented by the high granularity of the policy count, as well as the low product risk (reflected by the consistent underwriting profitability achieved throughout the review period).
Upward rating movement may result if liquidity metrics, on an adjusted basis, strengthen, underpinned by improvements in cash generation. This would need to be supported by adjusted capital adequacy remaining within a strong range, while earnings capacity is sustained at robust levels. Furthermore, an independent assessment of claims reserving sufficiency would be positively viewed. Conversely, the rating may be downgraded if the insurer’s risk adjusted capitalisation and/or liquidity metrics, on an adjusted basis, deteriorate below expectations. Furthermore, a substantial loss in market share, coupled with sustained underwriting deficits may result in negative rating movements.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2010)|
|Claims paying ability: A+(ZM)|
|Last rating (November 2014)|
|Claims paying ability: A+(ZM)|
|Primary Analyst||Committee Chairperson|
|Yvonne Masiku||Marc Chadwick|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
PICZ rating reports, 2010-2014
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.
Professional Insurance Corporation Zambia Plc 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 Professional Insurance Corporation Zambia Plc with no contestation of the rating.
The information received from Professional Insurance Corporation Zambia Plc and other reliable third parties to accord the credit rating included:
- Audited financial results to 31 December 2014
- Four years of comparative audited numbers
- Unaudited interim results to 30 September 2015
- Budgeted financial statements for 2015
- The current year reinsurance cover notes
- Statutory returns to 31 December 2014
- Industry comparative data, and
- Other related documents.
The rating above was solicited by, or on behalf of, the client, and therefore, GCR has been compensated for the provision of the rating.
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|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.|
|Interest||Money paid for the use of money.|
|Liquidity||The speed at which assets can be converted to cash.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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”)||The national scale rating provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||(1) All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. (2) The collection of financial assets constituting an entity’s investment portfolio.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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 more detailed glossary of terms/acronyms used as per GCR insurance glossary, please click here
GCR affirms Professional Insurance Corporation Zambia Plc’s rating at A+(ZM); Outlook Stable