Johannesburg, 16 Sep 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Emeritus Reinsurance Company South Africa Limited of BB+(ZA), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Emeritus Reinsurance Company South Africa Limited at B+, with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Emeritus Reinsurance Company South Africa Limited (“Emeritus Re SA”) based on the following key criteria:
Emeritus Re SA’s capitalisation is viewed to be limited, constraining the rating. This is largely due to the small capital base in absolute terms (FYE15: USD1m), which is expected to persist over the rating horizon. As such, the international solvency margin equated to 139% at FYE15 (FYE14: 181%), underpinned by the very low quantum of insurance and asset risks. The reinsurer’s statutory solvency capital requirements (“SCR”) cover under expected Solvency Assessment and Management (“SAM”) parameters equated to 0.8x as at 1H F16 (FYE15: 0.6x). Cognisance is taken that under the current regime the reinsurer’s statutory solvency measure registers below the minimum largely due to the classification of admissible reinsurers under the current methodology. Management expects to receive additional capital in order to meet the minimum SCR cover under SAM. In this respect, existing shareholders have committed to inject R10m by April 2017.
Liquidity metrics are expected to remain within a moderately sound range, supported by the conservative asset allocation strategy. In this respect, Emeritus Re SA expects to predominately invest in liquid assets. GCR views this as an appropriate means of limiting capital exposure during the start-up phase, while supporting liquidity metrics.
The start-up strategy centres on growing business within the Southern African region (by utilizing a follow strategy in target markets where the reinsurer has relationships with fellow subsidiary companies), while gradually increasing market presence within the local market. GCR expects execution risk to continue to result in a degree of revenue and profit volatility, noting that actual growth and profit performance have fallen short of initial projections. As such, the demonstrated attainment of strategic objectives remains a key rating consideration.
The business profile is moderately weak, given the constrained competitive position and limited earnings diversification. Management expects to enhance revenue across four key lines of business, as well as increase geographic diversification. Nonetheless, GCR expects the reinsurer’s business profile to remain relatively limited over the rating horizon, with revenue traction potentially becoming evident over the medium to long term.
Earnings capacity is viewed to be limited. In this respect, underwriting losses are expected to persist over the rating horizon (FY15: R3.8m loss; FY14: R3.4m loss), largely due to insufficient volumes being attained over the start-up phase to absorb operating expenses. Investment income is likely to remain relatively stable around R1m over the medium term, gradually supporting enhanced earnings capacity over the medium term, albeit with potential margin volatility due execution risk associated with the start-up strategy.
The reinsurer receives non-proportional risk and catastrophe cover administered by the parent and placed with rated international reinsurers (led by Trust International Insurance and Reinsurance Company based in Bahrain).
The international scale rating outlook is impacted by the sovereign rating, given that the majority of the reinsurer’s assets are locally domiciled.
Upward movement of the ratings or outlook are unlikely over the medium term in the absence of a material turnaround in earnings capacity and/or capitalisation. Conversely, deterioration in liquidity and/or weak solvency may lead to negative rating action.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2014)||Initial rating (August 2014)|
|Claims paying ability: BB+(ZA)||Claims paying ability: BB|
|Outlook: Stable||Outlook: Negative|
|Last rating (December 2015)||Last rating (December 2015)|
|Claims paying ability: BB+(ZA)||Claims paying ability: B+|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Yvonne Masiku||Marc Chadwick|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016.
Emeritus Re SA rating reports, 2014- 2015.
RSA Short Term Insurance Bulletins, 2001-2015.
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; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Emeritus Reinsurance Company South Africa 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, and contested by, Emeritus Reinsurance Company Limited South Africa, with the outlook amended following the provision of further information by the entity.
The information received from Emeritus Reinsurance Company South Africa Limited and other reliable third parties to accord the credit ratings included:
- The audited annual financial statements to 31 December 2015,
- Three years of audited comparative numbers,
- Management accounts to 30 June 2016,
- Full year detailed budget financial statements for 2016,
- The quantitative statutory returns for 2015 and 1H F16,
- Shareholders’ capitalisation plan, and
- 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.
|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.|
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GCR affirms Emeritus Reinsurance Company South Africa Limited’s rating of BB+(ZA); Stable Outlook.