Announcements Insurance Rating Alerts

GCR affirms Emeritus Re Zambia’s national scale financial strength rating of CCC+(ZM); Outlook Evolving

Rating action

Johannesburg, 05 October 2021 – GCR Ratings (“GCR”) has affirmed Emeritus Reinsurance Zambia Limited’s (“Emeritus Re Zambia”) national scale financial strength rating of CCC+(ZM), with the Outlook revised to Evolving from Negative. Simultaneously, GCR affirmed the international scale financial strength rating of CCC-, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Emeritus Reinsurance Zambia Limited Financial strength International CCC- Stable Outlook
National CCC+(ZM) Evolving Outlook

Rating rationale

The national scale rating of Emeritus Re Zambia has been placed on Evolving Outlook, reflecting potential for improved collections to strengthen earnings and liquidity, while supporting a slow recovery in solvency. In the absence of a persistent positive earnings trend, solvency metrics are likely to remain within a vulnerable range, suppressing the rating further.

Following elevated credit impairments in FY19, the reinsurer curtailed growth in receivables resulting in a moderated earnings impact. This caused a recovery in the underwriting result to ZMK6.5m and ZMK0.7m in 7M F21 and FY20 (FY19: ZMK7.7m loss). Essentially, credit impairments reduced to 18% of gross premiums (FY19: 24%) and were further supported by stringent cost containment strategies to reduce the operating expense ratio to 48.5% (FY19: 73.3%). We, however, note the low net incurred loss ratio of below 20% in both periods (supported by reserve releases) as atypical. A normalised claims experience is likely to result in underwriting results remaining negative, with net profits likely to be break-even or be slightly positive. In this respect, the reinsurer’s ability to stabilise earnings within a positive range is a key rating input over the short to medium term.

Emeritus Re Zambia’s risk adjusted capitalisation remained subdued, with the capital base inadequate to cover aggregate risk exposures. We project a rise in the GCR Capital Adequacy Ratio (“CAR”) to around 0.8x at FY21 (FY20: 0.2x; FY19: 0.4x), due to expected positive operational results in FY21, building on underwriting profits registered in both FY20 and 7M F21. The recovery is in line with the rise in the statutory solvency ratio to 27% at 7M F21 (FY20: 18%; FY19: 34%). Further recoveries in solvency to a rating adequate range are however dependent on the loss ratio remaining at competitive levels and/or further cost reductions, thus presenting a key rating sensitivity.

The reinsurer’s liquidity displays a stronger response to credit control measures taken by management, with enhanced operating cash flow generation lifting liquidity coverage to 1.3x at FY20 (FY19: 1.1x). We note potential for lower operational cash flow requirements in FY21 to further underpin improvements in the liquidity coverage ratio to around 1.5x, provided interim profitability is sustained to end-FY21 and working capital is well managed. This could positively impact the ratings if the trend continues into FY22.

Emeritus Re Zambia has a low market share of between 2% and 3% of domestic primary market cessions and is a very small player in other markets of operation. As a result, premium scale is low at around USD3m and is expected to remain similarly constrained relative to regional peers. The premium diversification assessment also considered the low premium volumes across lines of business, although partly offset by a well-balanced proportional representation of four classes in the business mix. Overall, Emeritus Re Zambia’s ratings receive support from Emeritus Reinsurance (Private) Limited (the core operating entity of the Zimre Holdings Limited group domiciled in Zimbabwe), given brand alignment, history of capital support and access to technical platforms.

Outlook statement

The Evolving Outlook captures the variability of the credit profile over the short term due to strong earnings trends that have been sustained to 7M F21 but could taper off as the claims experience normalises. A sustained improvement in earnings and liquidity could result in an upgrade, provided solvency metrics increase to an acceptable range. On the other hand, if the earnings trend weakens below expectations, solvency levels may remain below 1x increasing downgrade pressure. The international scale rating exhibits a wider tolerance range of aforesaid upside and downside risks over the short term, hence the Stable Outlook.

Rating triggers

A sustained positive earnings trend, embedding liquidity coverage of at least 1.5x, coupled by a GCR CAR of above 1x could support an upgrade of the national scale rating. Conversely, the national scale rating could be downgraded on a reversion to negative earnings that limits the GCR CAR below 1x and reduces liquidity coverage below the current range.

Analytical contacts

Primary analyst Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Committee chair Susan Hawthorne Senor Credit Analyst: Insurance Ratings
Johannesburg, ZA SusanH@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, October 2021
GCR Insurance Sector Risk Scores, September 2021

Ratings history

Emeritus Reinsurance Zambia Limited

Rating class Review Rating scale Rating class Outlook/Watch Date
Claims paying ability Initial International B Stable November 2009
Initial National BBB+(ZM) Stable November 2009
Financial strength Last International CCC- Stable Outlook October 2020
Last National CCC+(ZM) Negative Outlook October 2020

Risk score summary

Rating Components and Factors Risk score
Operating environment 3.50
Country risk score 1.00
Sector risk score 2.50
Business profile (2.00)
Competitive position (1.50)
Premium diversification (0.50)
Management and governance 0.00
Financial profile (2.00)
Earnings (0.50)
Capitalisation (1.25)
Liquidity (0.25)
Comparative profile 1.00
Group support 1.00
Government support 0.00
Peer analysis 0.00
Total Score 0.50

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
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.
Upgrade The rating has been raised on its specific scale.

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 party. 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 entities and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December
  • Full year company budgeted financial statements for 2021;
  • Unaudited company interim results to 31 July 2021; and
  • Other relevant documents.
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