Global Credit Ratings (GCR) has downgraded the national scale financial strength rating of APA Life Assurance to BBB (KE) from BBB+ (KE) and accorded the firm negative outlook.
The South Africa-based agency says the downgrade reflects APA Life’s sustained weakened capitalisation that stood at Sh373 million in 2016 compared to Sh455 million recorded in 2015.
This deviated significantly from expectation of an improvement to about Sh700 million.
“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 statutory reserve (catering for capital demands with profit products), cumulatively amounting to Sh274 million over the past two years,” the agency said in new notification. This depleted bonus stabilisation and statutory reserves and fully utilised a capital injection of Sh200 million made in 2015.
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 agency said the negative outlook reflects the potential for continued strain on the insurer’s credit profile due to persistently constrained earnings.
APA Life’s aggregate operating margins are likely to remain constrained over the rating horizon, despite considerable progress in curtailing attritional losses, the agency says. The rating is valid until September next year.
While the total benefits to total income ratio subsided to 45 per cent in fiscal year 2016 compared to 131 per cent in the previous year and are forecast to normalise at 60 per cent in 2017, the operating expense ratio remained high at 63 per cent, restricting operating margin headroom to -3 per cent in 2016 compared to -38 per cent in 2015.
“Earnings risk may persist, given the possible volatility in the benefit experience and continued scale inefficiencies, and considering challenges in executing the growth strategy. Strong evidence of the potential to achieve sustainable positive earnings represents a key rating consideration,” said GCR.