Johannesburg, 25 October 2017 — Global Credit Ratings has today downgraded the national scale financial strength rating assigned to APA Life Assurance Limited to BBB(KE) from BBB+(KE), with the outlook accorded as Negative. The rating is valid until September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to APA Life Assurance Limited (“APA Life”) based on the following key criteria:
The rating downgrade reflects APA Life’s sustained weakening in capitalisation (FY16: KES373m; FY15: KES455m), which deviated materially from expectations of an improvement to about KES700m. In GCR’s view, capital pressures are likely to remain over the rating horizon, if the insurer is to attain self-sustaining scale. The reduction in capital was due to low capital generation from operations, coupled with relatively large transfers from the statutory reserve (catering for capital demands of with profit products), cumulatively amounting to KES274m over the past two years. This depleted bonus stabilisation and statutory reserves, and fully utilised a capital injection of KES200m made in FY15. Risk adjusted capitalisation is expected to be maintained slightly above, or at, the minimum regulatory requirement (supported by shareholders’ commitment to inject additional capital).
The Negative outlook reflects the potential for continued strain on APA Life’s credit profile stemming from persistent earnings strain due to limited scale. In this respect, APA Life’s earnings capacity is viewed to be weak, with aggregate operating margins likely to remain constrained over the rating horizon, despite considerable progress in curtailing attritional losses. While the total benefits to total income ratio subsided to 45% in FY16 (FY15: 131%) and is expected to normalise at 60% in FY17, the operating expense ratio remained elevated at 63% (peer average: 30%), restricting operating margin headroom (FY16: -3%; FY15: -38%). Going forward, earnings risk may persist, given the possible volatility in the benefit experience and continued scale inefficiencies, and considering challenges in executing the growth strategy. As such, strong evidence of the potential to achieve sustainable positive earnings represents a key rating consideration.
Liquidity measured at a strong level, underpinned by improved asset liability matching. This was on the back of a drive to dispose of illiquid assets, in conjunction with an asset allocation stance favouring government securities. Accordingly, total investments covered total liabilities by a stable 1.1x at FY16, with cash and equivalents constituting a higher 78% of the investment portfolio at FY16 (FY15: 66%), facilitating solid coverage of near term liabilities. This enabled a closer match between the maturity profile and yields of assets, and policyholder liabilities. In this respect, liquidity is expected to measure within a strong range over the rating horizon, albeit with potential to improve over the medium term should management succeed in disposing of additional illiquid assets.
APA Life displays a limited business profile, with low market share exacerbated by high product concentration. Market share remained low at 1.8% in FY16 (FY15: 1.4%), with a moderate share of 5% of industry pure group life business diluted by very low participation on other products. In this regard, the insurer’s earnings profile is centred on group life (91% of GWP), with slower than anticipated growth in individual life and annuity business impeding prospects for gross premium diversification. In this respect, the business profile is expected to remain limited over the rating horizon.
The quality of the insurer’s reinsurance counterparties is considered sound, with all security reflecting domestic financial strength ratings in the A band or above.
Negative rating action could follow continued earnings strain and/or a deterioration in capitalisation. In contrast, the rating outlook could revert to stable if the insurer demonstrates a sustainable turnaround in profitability metrics and in the event that capital pressure is sufficiently managed over the outlook horizon.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2009)|
|Financial strength: A-(KE)|
|Last rating (October 2016)|
|Financial strength: BBB+(KE)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Yvonne Mujuru|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance companies, updated July 2017.
APA Life rating reports, 2009-2016.
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.
APA Life Assurance Limited 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, and contested by, APA Life Assurance Limited with no change to the rating decision.
The information received from APA Life Assurance Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2016
- Four years of comparative numbers
- Unaudited year to date results to 30 June 2017
- Budgeted financial statements for 2017
- Financial Condition Report 2016
- The current year reinsurance cover notes
- Actuarial valuation report 2016
- Other non-public statistical 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
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.|
|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 detailed glossary of terms please click here
GCR downgrades APA Life Assurance Limited’s rating to BBB (KE); Outlook Negative.