Johannesburg, 28 October 2020 – GCR Ratings (“GCR”) has affirmed Continental Reinsurance Company Limited’s
(“CRe Botswana”) international scale financial strength rating of B+, Outlook Stable. At the same time, CRe Botswana’s national scale financial strength rating has been affirmed at BB+(BW), Outlook Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Continental Reinsurance Company Limited||Financial strength||International||B+||Stable Outlook|
The affirmation of CRe Botswana’s ratings reflects expectations that the reinsurer’s financial profile will be maintained within a sound range over the medium term, supported by an intermediate business profile. Despite a capital reduction arising from the redemption of convertible preference share capital during 1H F20, strong earnings generation over the past two years which continued into 1H F20 is expected to support a recovery in risk adjusted capitalisation to strong levels by FY21, if the current trend is sustained. Furthermore, the business profile, though considered to be intermediate, is supportive of the earnings trajectory. However, the ratings reflect some sensitivity to high operating environment risks outside the primary market.
The reinsurer’s earnings capacity evidences sustained improvement into a strong range. Following successive retrocession program revisions over the past two years, underwriting margins increased to above 10% since FY18, from below 5% at the beginning of the review period. Resultantly, a lower deductible of around 1% of capital (from above 15% of capital pre-FY18) cushioned earnings from high severity risks, exhibiting potential for higher loss protection in catastrophe years. As such, the reinsurer’s underwriting margins followed an upward trend, albeit highly variable. In 1H F20, the underwriting margin equated to a high 36% (FY19: 16%; FY18: 11%), driven by a favourable loss ratio of 28%, and could be sustained above 15% to end-FY21, potentially generating cumulative net profits of above BWP50m (1H F20: BWP25m). Nonetheless, earnings capacity is subject to risks from exchange rate fluctuations and receivables, given exposure to foreign currency denominated bonds and a high proportion of premiums derived from regional markets, which could flatten the earnings trajectory.
Despite a contraction in the capital base attributable to the redemption of preference share capital (BWP51m) in 1H F20, CRe Botswana’s capital assessment remained within a strong range. This is underpinned by expectations of sound internal capital generation over the medium term, with GCR projecting the rolling three-year average return on revenue to remain within the current 15% to 20% range over the next two years. In this respect, there is potential for the GCR capital adequacy ratio (“CAR”) to recover to above 2x in FY21 from below 2x at 1H F20 (FY15 – FY19: above 2.5x), provided the existing full profit retention strategy is maintained over the outlook horizon.
Following the redemption of convertible preference shares, the reinsurer’s liquidity coverage reduced to 1.3x at 1H F20 (FY19: 1.9x) while operational cash coverage lowered to around 10 months (FY19: 14 months). Going forward, increased profitability presents potential for a build-up in liquidity balances, albeit efforts to ramp up collections may be affected by overarching liquidity challenges (mainly in markets outside Botswana), underpinning GCR’s liquidity coverage forecast of around 1.5x and operational cash coverage of slightly under 12 months by end-FY21. In this respect, the reinsurer’s ability to improve premium collections and manage dividend payments are key rating considerations over the medium term.
The reinsurer’s business profile is underpinned by a healthy competitive position and premium diversification. CRe Botswana accounted for an estimated 13% (FY18: 12.5%) share of primary market industry cessions in FY19. Due to consistency in registering above market premiums growth, GCR expects the share of primary market short term insurance cessions to increase to around 15%, with the uptake of life products and better spread of markets viewed as potential premium diversifiers over the longer term. The Botswana market continued to represent c.47% of gross premiums, with Zambia, Eswatini and Zimbabwe registering fluctuating contributions (collectively around 30%) over the review period, followed by diverse small exposures in multiple markets. While this level of diversification is positive, the high-risk nature of these regional markets significantly dilutes the operating environment assessment.
Overall, the assessment takes cognisance of the credit profile of Continental Reinsurance Plc (“the group”), which is domiciled in a weaker operating environment. GCR considered the credit profile of the group, together with sound regulatory insulation offered within the primary market, and no limit was placed on the ratings, although upward ratings migration could consider developments in the group’s credit profile.
The Stable Outlook is premised on the expectation that the reinsurer will continue generating strong earnings (with the three-year rolling return on revenue expected to measure in the 15% to 20% range), supporting a GCR CAR of above 2x by end-FY21. Liquidity coverage is forecast around 1.5x in FY21, with a further increase to 1.7x expected by FY22 on the back of better cash collection rates and a conservative dividend policy. The business profile has potential to strengthen over the longer term if the uptake of life risks and exposure to select satellite markets increases to material levels.
The ratings are unlikely to be upgraded over the short term, although a material improvement in the group’s credit profile could create headroom for the reinsurer’s ratings to strengthen. Conversely, downward ratings pressure could arise from sustained repression of liquidity metrics within the current range and/or if the GCR CAR measures below 2x over the outlook horizon.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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|
Continental Reinsurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Claims paying ability||Initial||International||BB||Stable||March 2016|
|Financial strength||Last||International||B+||Stable||March 2020|
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||5.50|
|Sector risk score||3.75|
|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.|
|Quota Share||The basic form of participating treaty whereby the reinsurer accepts a stated percentage of each and every risk within a defined category of business on a pro rata basis. Participation in each risk is fixed and certain.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|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.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|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.|
|Reserves||A portion of funds allocated for an eventuality.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|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 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 face to face and 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 entities and other reliable third parties to accord the credit ratings included:
- Group and company unaudited interim results to 30 June 2020;
- Group and company audited financial statements as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year group and company budgeted financial statements for 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.