Rating action

Johannesburg, 31 March 2021 – GCR Ratings (“GCR”) has affirmed Joint Reinsurance Company of Member States of CIMA’s (“CICA Re”) national scale financial strength rating of AAA_(TG) and international scale financial strength rating of BB+, with both ratings maintained on Stable Outlook.

Rating rationale

The affirmation of CICA Re’s financial strength ratings balances the reinsurer’s reinforced financial profile, through a XOF20.0bn capital injection over the past two years, and operating environment dilution from increasing exposures to the Conference Interafricaine des Marchés d’Assurance (“CIMA”) Zone, compounded by the adverse impacts of the Covid-19 pandemic. While the positive impact of the capital injection on liquidity was expected, the implementation of a more conservative investment strategy and demonstration of support from the membership base, increased the credit profile’s resilience; thus, offsetting unexpected downside risks from the pandemic. Meanwhile, the mandate and status of the company remained relatively unchanged, with revisions on legal cession quotas expected to better optimise utilisation of insurance capacities within the region, while aggressive marketing outside the CIMA Zone could further cement the competitiveness of the reinsurer.

The improvement in CICA Re’s financial profile was notably driven by the strengthening in liquidity following a shift to a more conservative asset allocation, evidenced by low-risk assets accounting for 82% of the investment portfolio at FY20 (FY19: 78%; FY18: 74%), while cash and equivalents represented a higher 73% of the investment portfolio in FY19 (FY18: 52%). As such, cash and stressed financial assets coverage of net technical liabilities stabilised around 1.4x over the last two years, while operational cash coverage equated to 9 months. Capitalisation also remained strong, well above concomitant risks, albeit remaining sensitive to pressures from increasing insurance risks due to the widening of legal cessions. The new preferential treatment mostly strengthened earnings, with the gross premiums base growing by 42% in FY20 to consolidate scale efficiencies within the company (FY20 total operating expense ratio: 36% vs 42% in prior five years), while the loss ratio remained well controlled around the five-year average of 50%. Consequently, the underwriting margin and net return on revenue of the reinsurer improved to 14% and 13% respectively in FY20, a build-up from 10% for each metric in the prior five years average. Although, current financial profile strength is expected to be maintained over the medium term, with liquidity and earnings strengths balancing well capitalisation pressures, increasing premium receivables and low-yielding cedant deposits are credit negatives. However, the balance sheet could be more optimised over the long term should newly instituted cash and carry policies at the level of reinsurers of the CIMA Zone, in addition to strict credit controls and adequate provisioning of aged premium receivables implemented at the entity’s level, be well executed.

Membership strength and diversity remained unchanged, limited by the high level of private sector shareholding within the structure, which reached 34% in FY20 after the capital raising exercise. Nevertheless, the member states of the CIMA Zone retain special control and rights over the mandate and strategy of the reinsurer with their 53% interests. In this respect, the legal cessions were revised to 2.25% of business written within the zone, 20% of treaties and 10% of facultative business (previously 5%, 10% and 5% respectively), to better accommodate cedants’ needs and optimise capacity utilisation within the insurance market. While GCR will monitor CICA Re’s ability to enforce the new legal cessions in the whole market, note is taken of gross premiums from the region almost doubling in FY20. This, coupled with ongoing portfolio cleaning exercises in Asia and the Middle East, moderated the assessment of blended market strength, given the contraction of India’s premiums contribution to 7% in FY20 from 22%, previously. Consequently, legal cessions could continue boosting exposures to the relatively weaker jurisdictions of the CIMA zone, limiting the reinsurer’s ability to maintain meaningful diversification outside the primary market. This represents a key rating consideration over the medium to long-term.

Outlook statement

The Stable Outlook reflects GCR’s view that the reinsurer will over the medium term maintain a financial profile strong enough to absorb pressures from increased exposures to the weaker jurisdictions of the CIMA Zone, with no material changes expected to the mandate and shareholding structure of the entity. Notably, liquidity and earnings strengths are likely to be maintained, supported respectively by a very conservative investment strategy and strict costs controls, as revenue increases with the widening of legal cessions.

Rating triggers

Although there is limited scope for an improvement in the international scale financial strength rating over the outlook horizon, improved liquidity management and sustained strengthening in earnings could result in positive rating action. Conversely, downward rating pressure could stem from the absence of diversification outside the CIMA zone meaningful enough to counterbalance the weaker credit profile of the regional market. Furthermore, a material deterioration in capitalisation that exceed expected improvements in earnings and liquidity will be negatively viewed.

Analytical contacts

Related criteria and research

Ratings history

Joint Reinsurance Company of Member States of CIMA

Risk score summary

Glossary

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 ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. 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 ratings included:

• Audited financial statements as at 31 December 2019;
• Four years of comparative audited financial statements to 31 December
• Full year budgeted financial statements for 2020;
• Unaudited management accounts to 31 December 2020;
• Reinsurance cover notes for 2020; and
• Other related documents.

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