Johannesburg, 01 October 2020 – GCR Ratings (“GCR”) has affirmed Emeritus Reinsurance (Private) Limited’s (“Emeritus Re”) international scale financial strength rating of CCC, with a Stable Outlook. Simultaneously, the national scale financial strength rating has been affirmed at A-(ZW), with the Outlook revised to Evolving.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Emeritus Reinsurance (Private) Limited||Financial strength||International||CCC||Stable Outlook|
The ratings reflect the strengths and weaknesses of Zimre Holdings Limited and its subsidiaries (collectively the group), with Emeritus Re representing the group’s core operations at c.94% of gross premiums. The ratings are anchored by the group’s predominant exposure to high risk operating environments in the Southern Africa region. In this respect, the reinsurer’s broad local presence in the region through small shares of primary market cessions in the majority of markets places the business profile within a neutral range. The financial profile is intermediate, with consolidated solvency and liquidity assessments negatively impacted by high asset class and market concentration of the relatively sizeable capital base, and pressures at regional subsidiaries.
The operating environment assessment remained low due to the high-risk nature of the majority of markets. Zimbabwe’s already weak credit profile reflects further repression by hyperinflation, which could extend into FY21, compounded by premium collection challenges in Zambia and Mozambique which are likely to continue over the medium term. Positively, credit risk containment efforts by the regulator in Malawi and growing premium and asset exposures to Botswana could, to an extent, improve the assessment, underpinning the reinsurer’s upside potential.
The business profile is neutral. The group has local presence in at least five regional markets where business is supported by long standing client facing relationships and, in some cases, cedant shareholdings that secure business flows. This has supported a competitive product spread with four lines of business being material to premiums, including long term risks. In this respect, the major markets of Malawi and Zimbabwe registered domestic gross premiums of above 25% and 9% of primary industry cessions, with the rest of the subsidiaries measuring below 5%. In GCR’s view, the business profile is likely to remain constrained by limited capacity for additional risk uptake in the absence of commensurate capital support for regional subsidiaries.
The financial profile is supported by intermediate capitalisation and liquidity assessments, which reflect a relatively sizeable capital base and low underwriting risk assumption, especially in the primary market. Due to the large investment in property, concentration risk moderates both capitalisation and liquidity assessments, notwithstanding the high group credit protection metrics. Furthermore, note is made of the low solvency metrics for Zambia and Mozambique subsidiaries, with the GCR capital adequacy requirement (“CAR”) ratios measuring below a prudent 1x, underscoring risks from the historically low transferability of capital across group subsidiaries in stressed scenarios. GCR, however, notes the transfer of c.USD3m capital to the Botswana intermediate non-operating holding company; Emeritus International Reinsurance Company Limited (“Emeritus International Re”), which could reduce solvency risks in regional subsidiaries.
Earnings capacity is a neutral rating input, given marginal profitability in the majority of markets owing to low scale efficiencies, while progressive earnings improvements in the primary market were disrupted by hyperinflation. Resultantly, the majority of subsidiaries registered an operating expense ratio of above 40%, largely due to high levels of premium impairments, which were more pronounced in Zambia. In GCR’s view, earnings are likely to remain within a neutral range, in line with historical trends, albeit volatility prone due to high operating leverage. Furthermore, the outlook on earnings considers the hyperinflationary environment in Zimbabwe and the relatively low conversion of the premium book into foreign currency, resulting in uncertainty in terms of profit development going forward.
The Evolving Outlook on the national scale rating captures the variable impact of the hyperinflationary environment in Zimbabwe on the credit profile, although the hedge provided by investment property has been effective so far. Furthermore, the transfer of c.USD3m capital to the Botswana holding company on the backdrop of very low GCR CAR in Zambia (0.4x) and Mozambique (0.9x), with both subsidiaries showing early signs of positive earnings in FY20, could resolve solvency concerns at the two subsidiaries as well as the potential growth strain across the rest of the regional portfolio. Conversely, the Outlook incorporates downside risks to the rating should the capitalisation of Emeritus International Re fail to address solvency and growth concerns at stressed subsidiaries in line with expectations and/or if the Zimbabwe property portfolio underperforms. The international scale rating is tolerant of possible short-term movements in the credit profile, hence the Stable Outlook.
The national scale rating may be upgraded if increased location of assets to lower risk jurisdictions supports premium growth in these markets, diluting exposure to Zimbabwe. Furthermore, the stabilisation of earnings within a profitable range at both underwriting and net profit levels could be positive to the ratings. Conversely, the national scale rating may be downgraded if risk adjusted capitalisation at subsidiaries is sustained at levels not consistent with the ratings and/or if earnings pressure at affected subsidiaries persists.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senior 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|
|Jurisdictional Supplement for Criteria, July 2020|
|GCR Country Risk Scores, May 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Emeritus Reinsurance (Private) Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||International||B+||Rating Watch||September 2010|
|National||A+(ZW)||Rating Watch||September 2010|
|Financial strength||Last||International||CCC||Stable Outlook||August 2019|
|National||A-(ZW)||Stable Outlook||August 2019|
Risk score summary
|Rating Components and Factors||Risk score|
|Country risk score||1.50|
|Sector risk score||2.75|
|Management and governance||0.00|
|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:
- Group and company financial results as at 31 December 2019;
- Four years of group and company comparative audited financial statements to 31 December
- Full year company budgeted financial statements for 2020;
- Unaudited company interim results to 31 March 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.
Due to severe foreign currency shortages, hyperinflation and significant monetary and exchange control policy changes over the last 12-18 months, in our opinion, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment and audited opinions. See the latest Jurisdictional Supplement for Criteria, published July 2020.