Johannesburg, 27 November 2017 — Global Credit Ratings has today 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 2018.
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 rating is supported by PICZ’s strong competitive position. The insurer is the market leader in the domestic industry, with a 22% share of short term gross premiums in FY16, and a relative premium base of around 5.1x 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.
The insurer reflects strong capitalisation levels, despite some moderation over the review period. Adjusting for a more conservative level of claims reserves, risk adjusted capital adequacy registered within a moderately strong range, and is expected to be sustained at a similar level over the rating horizon, supported by sound internal capital generation and conservative investment allocation. Reinsurance participants evidence a sound level of aggregate credit strength, while net retention levels are deemed to be conservative relative to capital.
Furthermore, 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 aggregated underwriting margin equated to 20% (FY15: 19%), while the return on net earned premiums (“NEP”) stood at 16% (FY15: 16%). GCR views the insurer’s track record of profitability to be indicative of continued strong medium term earnings capacity.
Cash generation has been bolstered by enhanced operational cash flow over the past two years, supporting a strengthening in liquidity metrics. Cash coverage of net technical provisions stood at 1.4x at FY16 (FY15: 1.3x), while coverage of average monthly claims equated to 9 months (FY15: 7 months). GCR expects the insurer’s investment management policy to be supportive of sound levels of liquidity, although noting the potential for working capital pressure stemming from industry wide premium collection challenges.
PICZ is viewed to reflect low reserving metrics in comparison to GCR’s observed norms, with the ratio of net outstanding claims reserves to NWP equating to 4% in FY16 (FY15: 0.5%). As such, GCR would positively view an independent assessment of reserving adequacy.
The earnings base evidences a high concentration to motor, which accounted for 81% of NWP in FY16 (FY15: 73%). The rating nevertheless considers the comparatively low product risk associated with this line of business and the consistency in underwriting profitability over the review period.
Positive rating movement may result should liquidity be maintained at strengthened levels, while the insurer continues to evidence stability in earnings metrics. Furthermore, an independent assessment of claims reserving sufficiency would be positively viewed. In contrast, a sustained weakening in earnings metrics and/or reduction in risk adjusted capitalisation could translate into negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2010)|
|Claims paying ability: A+(ZM)|
|Last rating (November 2016)|
|Claims paying ability: A+(ZM)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017.
PICZ rating reports, 2010 – 2016.
RATING LIMITATIONS AND DISCLAIMERS
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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 statements to 31 December 2016
- Four years of comparative financial statements to 31 December
- Budgeted financial statements to December 2017
- Unaudited management accounts to 30 June 2017
- The current year reinsurance treaties
- Other relevant company specific information
The rating above was solicited by, or on behalf of, the rated client, 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
|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.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|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.|
|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 detailed glossary of terms, please click here
GCR affirms Professional Insurance Corporation Zambia Plc’s rating of A+(ZM); Outlook Stable