Johannesburg, 12 December 2019 – GCR Ratings (“GCR”) has affirmed Professional Insurance Corporation Zambia PLC’s (“PICZ”) national scale financial strength (formerly claims paying ability) 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|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for PICZ was placed ‘Under Criteria Observation’. GCR finalised the review for PICZ under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for PICZ has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
PICZ’s rating balances the insurer’s strong competitive position, sound earnings and strong capitalisation with high premium concentration and intermediate liquidity.
The rating is supported by PICZ’s strong competitive position. The insurer is the market leader in the Zambian short term insurance industry, with its market share of 24% of industry gross premiums translating to approximately 5x the industry average. GCR expects PICZ to sustain its strong competitive position, supported by its franchise strength and ongoing growth initiatives.
The assessment of PICZ’s overall business profile nevertheless considers high premium concentration, with more than 80% of net premiums derived from motor and all business sourced from Zambia. Furthermore, the insurer reflects a level of policyholder concentration, with the largest and second largest clients contributing 27% and 12% of gross premiums in FY18.
Despite a moderation since the start of the review period, PICZ’s earnings are viewed to be healthy, with the underwriting margin having stabilised at between 9% and 10.5% between FY17 and 9M F19. Similarly, return on net earned premiums has registered at between 11% and 13%, while both metrics reflect low volatility in recent periods. GCR expects earnings metrics to be maintained at similar levels over the outlook horizon, with comparatively elevated claims experience and the impact of receivable impairments likely to continue to moderate earnings relative to historical levels. The earnings assessment further considered low claims reserving metrics relative to GCR’s observed norms, which is viewed to increase risk of reserving corrections.
Risk adjusted capitalisation is assessed to be strong, supported by contained underwriting risk and limited market risk, as well as sound internal capital generation. In this regard, GCR’s capital adequacy requirement (“CAR”) coverage is expected to exceed 1.5x over the outlook horizon, even if a stressed dividend scenario is applied.
PICZ’s liquidity is viewed to be intermediate, with GCR’s stressed financial asset coverage of net technical liabilities registering around 1.3x, and coverage of operational cash flow requirements equating to around 4 months. Liquidity is expected to register at similar levels over the outlook horizon, although could be impacted by lower than expected operational cash flow generation.
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. Furthermore, risk adjusted capitalisation and liquidity are expected to remain at rating sufficient levels.
Positive rating action could follow a sustained strengthening in earnings and liquidity. Conversely, downward rating pressure may arise following lower than expected earnings that adversely impact capitalisation or liquidity.
|Primary analyst||Susan Hawthorne||Senior Analyst|
|Johannesburg, ZA||Susanh@GCRratings.com||+27 11 784 1771|
|Committee chair||Yvonne Mujuru||Sector Head: Insurance Ratings|
|Johannesburg, ZA||Ymujuru@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 2019|
|GCR Insurance Sector Risk Scores, December 2019|
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(ZM)||Stable||June 2010|
Risk Score Summary
|Risk scores||Professional Insurance Corporation Zambia Plc|
|Country risk score||1.75|
|Sector risk score||2.50|
|Management and governance||0.00|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|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.|
|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.|
|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).|
|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.|
SALIENT POINTS OF ACCORDED RATING
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 was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Professional Insurance Corporation Zambia Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Professional Insurance Corporation Zambia Plc 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 Professional Insurance Corporation Zambia Plc and other reliable third parties to accord the credit rating included:
- The audited financial results up to 31 December 2018
- Four years of comparative audited numbers to 31 December
- Unaudited management accounts to 31 October 2019
- Budgeted financial statements to 31 December 2019
- Other related documents.