|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|CBZ Life Limited||Financial strength||National||A(ZW)||Negative Outlook|
The rating affirmation reflects the insurer’s resilient financial profile, underpinned by strong liquidity and risk adjusted capitalisation. Offsetting these strengths is a comparatively limited business profile which compressed due to the hyperinflationary environment, triggering a drastic deterioration in earnings due to scale inefficiencies and monetary losses. While management has indicated efforts to reprice the book in line with inflation and restore premium scale, GCR sees elevated risks from the operating environment, compounded by the COVID-19 pandemic, as an impediment to the timely recovery of both scale and earnings, underpinning the Negative Outlook.
Liquidity metrics have been maintained within a very strong range despite a shift in asset allocation as a result of management’s strategy to invest in value preserving assets. In this regard, coverage of net technical liabilities by cash and stressed financial assets equated to 7.1x (FY18: 4.2x), while operational cash coverage registered at 3 months (FY18: 24 months). Liquidity is likely to be assessed within a similar range going forward, given the insurer’s strategy to maintain the current asset allocation considering the hyperinflationary environment.
Risk adjusted capitalisation slightly moderated (albeit being maintained within a strong range) due to capital erosion attributable to hyperinflation and the associated devaluation of the local currency. As such, the GCR capital adequacy ratio registered at 3.0x (FY19: 3.5x; FY18: 5.2x), whilst the capital base, in real terms, lowered to USD5.8m (FY18: USD21.1m). Going forward, risk adjusted capitalisation is expected to remain strong, albeit susceptible to further moderation given operating environment headwinds.
Earnings moderated to an intermediate range on the back of a monetary loss of ZWL30m which resulted in the insurer registering a net loss of ZWL37.7m (FY18: ZWL27.2m profit). This was exacerbated by loss of scale and a spike in operating expenses due to foreign currency denominated overheads and staff related costs. As such, the operating expense ratio registered at a review period peak of 101% (FY18: 30%; prior four-year average: 31%). While, potential exists for earnings to recover, although to levels below historical trends, supported by investment income, prospects of downward pressure remains, emanating from the ongoing hyperinflationary environment. The ability of the insurer to demonstrate sustained improvement in earnings represents a key rating consideration over the rating outlook.
CBZ Life’s market position remained limited, with the devaluation in the local currency resulting in industry-wide contraction in premiums. As such, market and relative market share equated to a lower 1.5% and 0.2x in FY19 (FY18: 2.6% and 0.3x), respectively. Nevertheless, the insurer’s market share is expected to improve on the back of frequent reviews of sum insured in line with inflation, albeit with risks that it could remain lower than historical levels due to erosion of household incomes. This is compounded by limited geographic diversification and product concentration to funeral products. In this respect, the insurer’s ability to restore the premium base to historic scale represents a further rating consideration.
The rating derives uplift from implied parental support from CBZ Holdings Limited (“the group”), reflected by strong integration with the group, through operational and brand alignment, coupled with cross-selling of products within the group.
GCR expects earnings to remain pressured given prospects of persistent inflationary environment and low recovery in scale, negatively impacting risk adjusted capitalisation while liquidity assessment may remain unchanged. The business profile could moderate if efforts to reprice the book fall below expectations.
Reversion to a Stable Outlook may follow a sustained improvement in earnings and/or liquidity while maintaining risk adjusted capitalisation at current levels. Conversely, downward rating movement could result from sustained loss of premium scale which may bear negatively on earnings and GCR’s assessment of the business profile. Furthermore, a reduction in the group’s overall credit profile may result in reduced capacity to support CBZ Life, resulting in negative rating pressure.
|Primary analyst||Linda Matavire||Analyst: Insurance Ratings|
|Johannesburg, ZA||LindaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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, May 2020|
|GCR Insurance Sector Risk Scores, July 2020|
CBZ Life Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||BBB+(ZW)||Positive Outlook||March 2016|
|Financial strength||Last||National||A(ZW)||Stable Outlook||November 2019|
Risk score summary
|Rating components and factors||Risk score|
|Country risk score||0.00|
|Sector risk score||2.75|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Primary Market||The part of the capital markets that deals with the issuance of new securities.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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.|
SALIENT POINTS OF ACCORDED RATINGS
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 the rated entity. 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. The rated entity participated in the rating process via virtual 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 from the rated entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 30 June 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.
Due to severe foreign currency shortages, hyperinflation and significant monetary and exchange control policy changes over the last 12-18 months, in our opinion, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment and audited opinions. See the latest Jurisdictional Supplement for Criteria, published July 2020.