Johannesburg, 11 May 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to CBZ Insurance (Private) Limited of BBB+(ZW) , with the outlook accorded as Positive. The rating is valid until May 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to CBZ Insurance (Private) Limited (“CBZ Insurance”) based on the following key criteria:
The Positive Outlook reflects the potential for CBZ Insurance’s business and liquidity profile to strengthen over the outlook horizon, supported by diversification efforts. In this respect, the insurer plans to reduce revenue concentration to CBZ Holdings (Pvt) Ltd (‘the group”), by introducing new products and enhancing distribution channels. Accordingly, revenue from the group is expected to gradually reduce from a high 47% in FY17. Furthermore, management are diversifying banking counterparties, with increased placements in other well rated financial institutions. As such, the bedding down of these initiatives could result in upward rating movement.
The rating benefits from very strong risk adjusted capitalisation, supported by robust capital generation from operations and a conservative dividend policy (four year capital CAGR: 51%). In this respect, the international solvency margin registered at a very high 131% at FY17 (FY16: 93%), and is budgeted to register within a similar range at FY18 (124%). Risk adjusted capitalisation is likely to remain very strong over the rating horizon, anchored by a solid capital base, evidencing capacity to cater for strategy aligned uptake of underwriting and market risks. The reinsurance panel reflects an intermediate aggregate level of credit strength. Nonetheless, the maximum net deductible per risk and event was maintained at a conservative level relative to capital.
Earnings capacity is viewed to be strong, supported by consistent and robust underwriting margins, with a once-off unrealised investment gain in FY17 elevating the review period trend. In this respect, the five year underwriting margin equated to 18% (FY17: 20%; FY16: 16%), while the investment yield registered at a higher 19% (FY16: 6%; review period: 9%). Strong underwriting performance has been a function of prudent underwriting and risk selection returning a low portfolio loss ratio, coupled with unusually low business acquisition costs. GCR expects earnings capacity to be maintained within a strong range over the rating horizon, underpinned by consistent earnings drivers.
Liquidity metrics registered at strong levels with cash coverage of technical reserves equating to 1.9x at FY17 (FY16: 2.5x). Robust operating profit generation and a conservative asset allocation is expected to sustain strong liquidity over the rating horizon. Furthermore, improved banking counterparty diversification is viewed to have enhanced the insurer’s overall liquidity profile.
CBZ Insurance’s business profile is viewed to be intermediate, largely due to moderately strong competitive positioning, which is partially offset by high earnings concentration. Accordingly, the insurer’s share of short term industry gross premiums equated to 5%, while one line of business contributed 55% of revenue, with 47% (FY16: 39%) of revenue generated from the group. Going forward, management aims to strengthen the business profile by accelerating premium development (BGT18 growth rate: 36%), while enhancing earnings diversification through leveraging off the insurer’s solid group franchise value, extensive shared distribution networks and new business initiatives. Progress, in this regard, noting execution risks, would be a key rating input over the medium term.
GCR views country risk factors to be elevated, and a systematic rating consideration applicable to insurers. Operational challenges are likely to persist over the rating horizon, albeit with positive changes in the socio-political outlook and macroeconomic fundamentals possible over the medium term, should the political situation stabilise.
Upward rating movement is likely to stem from enhanced earnings diversification, coupled with an improved liquidity profile. This would need to be supported by risk adjusted capital adequacy remaining within a very strong range. Downward rating pressure may arise from a material deterioration in asset quality or liquidity.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (March 2016)|
|Claims paying ability: BBB(ZW)|
|Last rating (May 2017)|
|Claims paying ability: BBB+(ZW)|
|Primary analyst||Secondary analyst|
|Godfrey Chingono||Linda Matavire|
|Senior Credit Analyst||Junior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
CBZ Insurance rating reports, 2016-2017
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.
CBZ Insurance (Private) Limited 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 credit rating has been disclosed to CBZ Insurance (Private) Limited with no contestation of the rating.
The information received from CBZ Insurance (Private) Limited and other reliable third parties to accord the credit rating included:
- Audited financial statements to December 2017
- Four years of comparative financial statements
- Unaudited interim results as at March 2018
- Budgeted financial statements for 2018
- Non-life actuarial report for 2017
- 2018 reinsurance cover notes
- Other related documents.
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
|Acquisition Cost||The expenses incurred by an insurance company that are directly related to putting the business on the books of the company. The largest portion of this cost is usually the agent’s or sales representative’s commission or bonus.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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 Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|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.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|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.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|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.|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|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.|
|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.|
|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.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms please click here
GCR affirms CBZ Insurance (Private) Limited’s rating of BBB+(ZW); Outlook Positive.