Johannesburg, 30 November 2018 — Global Credit Ratings has today affirmed Professional Insurance Corporation Zambia Plc’s rating of A+(ZM), with the outlook accorded as Stable. The rating is valid until November 2019.
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 factors:
The rating is supported by PICZ’s strong competitive position. The insurer is the market leader in the domestic industry, with a 24% share of short term gross premiums in FY17, and a premium base of around 5.2x the industry average. Despite increasing competitive pressures, GCR expects the insurer to defend its market leadership position over the rating horizon, supported by its strong brand, client relationship management, and competitive level of underwriting capacity.
Cross cycle earnings capacity is viewed to be strong, underpinned by very strong underwriting margins and sound investment returns. In this respect, the insurer’s five year aggregate underwriting margin equated to 18% (FY17: 10%), while the return on net earned premiums stood at 15% (FY17: 13%). Note is, however, taken of the reduction in underwriting profitability in FY17, following an escalation in the cost base. Accordingly, the ability of the insurer to achieve anticipated cost efficiencies is likely to be a key earnings driver over the short to medium term.
Risk adjusted capitalisation strengthened in FY17, underpinned by contained insurance risk and conservative investment allocation, together with above average profit retention. Going forward, however, GCR notes potential for risk adjusted capitalisation to revert to a moderately strong level from the strong level posted at FY17 should the turnaround in underwriting performance not materialise as expected. Reinsurance cover is placed with participants with a sound level of aggregate credit strength, while net retention levels are deemed to be conservative relative to capital.
Cash generation was impacted by a significant working capital absorption in FY17, resulting in a dilution in liquidity metrics from the strong levels posted in the prior two years. In this respect, cash coverage of net technical liabilities registered at 0.8x at FY17 (FY16: 1.4x), while coverage of average monthly claims lowered to 6 months (FY16: 9 months). In GCR’s view, liquidity is likely to register at similar levels over the outlook horizon, given industry wide premium collection challenges and a shift in investment allocation.
PICZ is viewed to reflect low reserving metrics in comparison to GCR’s observed norms, with the ratio of net outstanding claims and IBNR reserves to NWP equating to 5% in FY17 (FY16: 4%). In this respect, in a stress test scenario, liquidity and capitalisation metrics would moderate fairly materially on an adjusted basis.
The earnings base evidences a high concentration to motor, which accounted for 81% of NWP in FY17 (FY16: 81%). The rating nevertheless considers the comparatively low product risk associated with this line of business and the fairly consistent average underwriting profitability over the review period.
Positive rating action may follow a strengthening in risk adjusted capitalisation and liquidity, and reduced risk of reserving corrections. In contrast, negative rating action may follow a sustained weakening in earnings, or if continued premium collection challenges result in a deterioration in liquidity or capitalisation.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2010)|
|Claims paying ability: A+(ZM)|
|Last rating (November 2017)|
|Claims paying ability: A+(ZM)|
|Primary analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
PICZ rating reports, 2010 – 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.
Professional Insurance Corporation Zambia Plc participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Professional Insurance Corporation Zambia Plc.
The information received from Professional Insurance Corporation Zambia Plc and other reliable third parties to accord the credit ratings included:
- Audited financial statements to 31 December 2017
- Four years of comparative financial statements to 31 December
- Unaudited management accounts to 30 September 2018
- Budgeted financial statements for 2018
- The 2018 reinsurance programme summary
- Other related documents
The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
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.|
|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.|
|Earned Premium||That part of the premium applicable to the expired part of the policy period.|
|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.|
|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.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Outstanding Claims Reserve||A technical reserve of an insurance company established to provide for the future liability for claims which have occurred and have been reported but which have not yet been settled.|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
For a more detailed glossary of terms please click here
GCR affirms Professional Insurance Corporation Zambia Plc’s rating of A+(ZM); Outlook Stable