Johannesburg, 28 February 2018 — 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 affirmed the international scale claims paying ability rating assigned to Continental Reinsurance Company Limited of BB, with the outlook accorded as Stable. The ratings are valid until December 2018.
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 criteria:
The ratings of CRe Botswana derive significant support from very strong liquidity. Despite high cash absorption from operations registered in FY17, liquidity metrics remained high, with cash coverage of net technical liabilities measuring at 1.1x at FY17 (FY16: 2.2x). While the reduction from robust prior year levels is noted, GCR views potential for liquidity stabilisation stemming from other available tradable assets, coupled with an expected normalisation in prospective operating cash flows and a conservative investment strategy.
Similarly, capitalisation was moderately strong, tolerating the steep reduction in capital to BWP50m at FY17 (FY16: BWP75m). The reduction was on account of a material loss from operations, albeit with well contained aggregate risks supporting capital adequacy within a sound range. Going forward, GCR expects sound capital targets in the group’s capital management framework and expressed shareholder support in case of a growth strain on capital to support solvency strength.
Conversely, earnings capacity is viewed to be moderately weak, with a sharp deviation from the historical level registered in FY17 largely viewed to be transient. This is in view of the remote source of the large loss that reduced review period profits to a cumulative BWP10m loss, and subsequent remedial measures taken to address the retrocession structure. In this respect, GCR expects disciplined operating expense management, premium scale enhancement measures and a moderation in earnings risk stemming from a drastically reduced retention per risk to present an upside to an overly moderately weak earnings capacity envisaged over the outlook period. Nonetheless, cognisance is taken of the indeterminate earnings impact of partially hedged exchange rate fluctuations to offset such potential.
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 55% of short term reinsurance industry gross premiums in the primary market, while registering reasonable market shares and competitive growth rates in diverse regional markets. This is partially offset by a concentrated business mix, which reflects a slant towards the property portfolio (77% of gross premiums in FY17). GCR expects the reinsurer’s business profile to improve gradually on the back of increased participation on treaty business across the market spectrum.
CRe Botswana is viewed to benefit from potential capital support from its parent, Continental Reinsurance Plc (based in Nigeria), with strategic importance viewed to be a supporting factor given traction in the group’s regional diversification objectives. Furthermore, the international scale rating takes into account Botswana’s sovereign credit rating of A-, given that the majority of revenue are generated domestically and most of the assets are domiciled locally.
Positive rating movement could develop over the medium term if the reinsurer realises improvements in earnings capacity and meets capitalisation targets. Downward rating pressure may follow low earnings relative to expectations, failure to attain capitalisation targets and/or a reduction in the effectiveness of the support framework.
|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 (March 2017)||Last rating (March 2017)|
|Claims paying ability: A-(BW)||Claims paying ability: BB|
|Outlook: Stable||Outlook: Stable|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Criteria for Rating Start-up and Newly Established Insurance Companies, updated July 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 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 with no contestation of the ratings.
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 2017
- The audited annual financial statements to December 2016
- Three years of comparative audited numbers
- 2018 reinsurance cover notes
- Other related documents.
The ratings above were solicited by, or on behalf of, the rated client, 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.