Announcements Insurance Rating Alerts

GCR affirms Continental Reinsurance Company Limited’s rating of A-(BW); Outlook Stable.

Johannesburg, 28 February 2019 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Continental Reinsurance Company Limited of A-(BW), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has downgraded the international scale claims paying ability rating assigned to Continental Reinsurance Company Limited to BB-, from BB, with the outlook accorded as Stable. The ratings are valid until February 2020.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Continental Reinsurance Company Limited (“CRe Botswana”) based on the following key factors:

CRe Botswana shareholders injected BWP48m (USD4.4m) in capital during FY18, which more than offset the FY17 capital loss from operations, while supporting the reinsurer’s growth strategy. The injection bolstered capital to BWP110.3m at FY18, consolidating risk adjusted capitalisation within a moderately strong range. As such, the international solvency margin recovered to 130% (FY17: 61%; FY16: 102%), whilst conservative credit and market risk exposures were maintained. GCR expects current capital buffers to adequately cater for risks over the rating horizon, with further entrenchment of capital management guidelines serving to mitigate medium to longer term capital risks.

Injected capital buttressed liquid assets to 89% (FY17: 83%) of the investment portfolio, underscoring the reinsurer’s conservative investment strategy. Furthermore, prudent credit impairments and a clean-up of some related party receivables supported asset quality at strong levels, with underlying policies likely to continue over the medium term. Cognisance is, however, made of the location of 61% (FY17: 33%) of liquid funds outside the primary market, exposing a substantial portion of assets to markets of lower credit strength.

Congruently, liquidity metrics measured within a strong range, sustaining the review period trend. Cash and equivalents covered net technical reserves by a higher 1.7x (FY17: 1.3x) and average monthly claims by 42 months (FY17: 13 months). Although exhibited liquidity buffers somewhat absorbed increased banking counterparty risk (overlaid by sovereign risk pertaining to higher exposure to offshore investments), ratings show negative sensitivity to asset location decisions.

Earnings capacity reflects suppression from a deep prior year loss, with the strong rebound in FY18 earnings supporting a moderately strong factor assessment going forward. While prior year transient losses arose from a severe claim in a remote portfolio, a drastic reduction in the net commission expense ratio (FY18: 19%; FY17: 32%) improved underwriting margins to a review period high of 18% (FY17: -31%), albeit representing another atypical movement. Nonetheless, disciplined operating expense management, continuing retrocession structure changes (with the maximum deductible per risk and event reducing from materially elevated to moderate levels relative to capital at FY19) and gross premium scale enhancement measures are likely to stabilise earnings performance, somewhat, over the medium term. Offsetting these prospective strengths is the high susceptibility of earnings to variable impairments due to exposure to fragile markets against the backdrop of prudent asset valuation policies.

The business profile is intermediate, with a moderate competitive position offset by a concentrated product mix. Competitive position is anchored by the reinsurer’s dominant market position, accounting for 51% of short term reinsurance industry gross premiums in the primary market, while registering reasonable growth rates in diverse regional markets. This is partially offset by a concentrated business mix, which reflects a slant towards the property portfolio (73% of gross premiums in FY18). GCR expects the reinsurer’s business profile to improve gradually on the back of increased participation on treaty business across its market spectrum.

The international scale rating historically supported on the reinsurer’s predominate exposure to Botswana’s sovereign rating. In this respect, the downgrade of the rating to BB- reflects increased asset exposure to a much lower rated sovereign.

A rating upgrade could arise from a sustained strengthening in earnings capacity and/or an improvement in banking counterparty exposure. Conversely, the ratings could be downgraded if earnings capacity reduces materially to the detriment of either capital or liquidity, while the international scale rating shows negative sensitivity to geographic exposures, of assets and premiums, at lower credit strength relative to the primary market.

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (March 2016) Initial rating (March 2016)
Claims paying ability: A-(BW) Claims paying ability: BB
Outlook: Stable Outlook: Stable
   
Last rating (February 2018) Last rating (February 2018)
Claims paying ability: A-(BW) Claims paying ability: BB
Outlook: Stable Outlook: Stable

ANALYTICAL CONTACTS

Primary analyst
Godfrey Chingono
Deputy Sector Head: Insurance Ratings
(011)784-1771
godfreyc@globalratings.net
 
Committee Chairperson
Yvonne Mujuru
Sector Head: Insurance Ratings
(011)784-1771
ymujuru@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated May 2018

Criteria for Rating Start-up and Newly Established Insurance Companies, updated May 2018

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

Continental Reinsurance Company Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to Continental Reinsurance Company Limited.

The information received from Continental Reinsurance Company Limited and other reliable third parties to accord the credit ratings included:

  • Draft annual financial statements to December 2018
  • The audited annual financial statements to December 2017
  • Three years of comparative audited numbers
  • 2019 reinsurance cover notes
  • Other related documents.

The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Assets The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’
Balance Sheet An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.
Capacity The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.
Insurer The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.
Interest Money paid for the use of money.
Liquidity The ability of an insurer to convert its assets into cash to pay claims if necessary.
Loss Ratio The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.
Premium The price of insurance protection for a specified risk for a specified period of time.
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 An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.
Retention The net amount of risk the ceding company keeps for its own account.
Risk Uncertainty as to the outcome of an event when two or more possibilities exist.
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.
Statutory Required by or having to do with law or statute.
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.

For a detailed glossary of terms please click here

GCR affirms Continental Reinsurance Company Limited’s rating of A-(BW); Outlook Stable.

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