Johannesburg, 28 September 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Emeritus Reinsurance Company Limited (formerly Malawi Reinsurance Company Limited) of BBB(MW), with the outlook accorded as Negative. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Emeritus Reinsurance Company Limited at B, with the outlook accorded as Negative. The ratings are valid until August 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Emeritus Reinsurance Company Limited (“Emeritus Re Malawi”) based on the following key factors:
The negative outlook reflects the potential for downward rating movement should aged debtors remain elevated while impacting capitalisation. While the reinsurer’s risk adjusted capitalisation improved in FY17, note is taken that this was largely a function of a reduction in insurance risk, which partially mitigated the high level of debtors in excess of 180 days. Accordingly, the adjusted international solvency margin equated to a higher 44% at FY17 (FY16: 29%). In GCR’s view, the potential for risk adjusted capitalisation to register within a moderately weak level remains high, given the challenging operating environment, and in the absence of an improvement in debtor management practices.
Cash coverage of net technical liabilities equated to 0.8x (FY16: 0.6x), while claims cash coverage was higher at 18 months (FY16: 10 months). However, note is taken that the reinsurer has no additional liquidity support available. As such, improved operating cash flow generation which is dependent on enhanced working capital and liquidity management, represents a key rating consideration.
Emeritus Re Malawi’s earnings capacity measured at moderately strong levels, with the five year aggregated underwriting margin equating to 5% (FY17: 9%) and the operating margin averaging 16% over the review period. In GCR’s view, underwriting performance is likely to remain within a moderately strong range over the outlook horizon. Furthermore, the overall retrocession panel reflects sound aggregated counterparty strength, while the maximum net retention per risk and event equates to an intermediate 8% of FY17 capital.
Emeritus Re Malawi is the only locally licenced reinsurer in Malawi, forming part of a larger reinsurance group. The reinsurer’s business profile is nevertheless viewed to be moderate, underpinned by relatively low balance sheet strength relative to regional peers, partially offsetting the strong domestic competitive position. Going forward, the reinsurer’s business profile is expected to remain limited, given the low quantum of capital and premium levels in the context of the regional reinsurance market, which is likely to continue limiting the rating over the outlook horizon.
The international scale rating is impacted by the fact that the bulk of the reinsurer’s assets are vested in Malawi, which does not have a sovereign rating. Further consideration in this regard is given to the uncertain economic environment, which is characterised by high inflationary pressure and the sustained weakening of the Malawi Kwacha against major foreign currencies.
Downward rating pressure could arise should risk adjusted capitalisation register within moderately weak levels and/or liquidity metrics deteriorating, or in the event of negative group considerations. Continued weaknesses in country and industry risk factors may have a negative rating impact. Conversely, upward rating movement could arise from a material strengthening in capitalisation, key liquidity metrics and/or strengthened working capital management.
NATIONAL SCALE RATINGS HISTORY
INTERNATIONAL SCALE RATING HISTORY
|Initial rating (September 2008)||Initial rating (September 2008)|
|Claims paying ability: A(MW)||Claims paying ability: B+|
|Outlook: Stable||Outlook: Stable|
|Last rating (August 2017)||Last rating (August 2017)|
|Claims paying ability: BBB(MW)||Claims paying ability: B|
|Outlook: Negative||Outlook: Negative|
Sector Head: Insurance Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Malawi Re rating reports, 2008-2017
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 ratings 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.
Emeritus 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 Emeritus Reinsurance Company Limited.
The information received from Emeritus Reinsurance Company Limited and other reliable third parties to accord the credit ratings included:
- Audited annual financial statements to 31 December 2017
- 4 years of comparative audited financial statements
- Unaudited interim results to 30 June 2018
- Budgeted financial statements for 2018
- 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.
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms please click here
GCR affirms Emeritus Reinsurance Company Limited’s (formerly Malawi Reinsurance Company Limited) rating of BBB(MW); Outlook Negative.