Announcements Insurance Rating Alerts

GCR affirms Emeritus Reinsurance (Private) Limited’s national scale financial strength rating of A-(ZW); Outlook revised to Stable from Evolving on reduced earnings risk

Rating action

Johannesburg, 05 October 2021 – 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 Stable from Evolving.

Rated entity / Issue Rating class Rating scale Rating Outlook/Watch
Emeritus Reinsurance (Private) Limited Financial strength International CCC Stable Outlook
National A-(ZW) Stable Outlook

Rating rationale

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 above 87% contribution to gross premiums over the past two years. The ratings are framed by the group’s predominant exposure to high-risk operating environments in the Southern Africa region. The financial profile is intermediate, with consolidated solvency and liquidity assessments negatively impacted by limited capital mobility within the group, given a high allocation to Zimbabwe, and capital pressures at regional subsidiaries. The revision of the Outlook from Evolving to Stable reflects our view of reduced earnings risk in Mozambique, Zambia and Zimbabwe following corrective measures taken over the past two years, which are expected to bear positive results over the medium term.

The group’s diversified business model is a comparative credit strength, which could become more positive to the ratings if scale limitations in Botswana and Zambia are addressed. It is noteworthy that gross premium scale in Malawi and Mozambique has been sustained above USD5m while acquisitive growth in Zimbabwe, following the consolidation of Credit Insurance Zimbabwe Limited and more recently Fidelity Life Assurance of Zimbabwe (“Fidelity Life”), has supported overall gross premiums of c. USD34m in FY20 (FY19: c. USD20.7m; FY18: c. USD32.3m). In this respect, gross premiums remained resilient (containing adverse impacts of inflation in Zimbabwe and exchange rate instability in Zambia) and were spread among four significant products. We note potential for the group to consolidate its position after reorganisations in Botswana and Zimbabwe, albeit material improvements are likely to follow the capitalisation of subsidiaries outside Zimbabwe.

The financial profile is supported by the high group capital base, which measured above USD40m (FY20: USD65.7m; FY19: USD42.1m), anchored by the primary market. However due to the large investment in property exposure, concentration risk moderates the capitalisation assessment. Furthermore, note is taken of low solvency metrics at the Zambian subsidiary, with the GCR capital adequacy requirement (“CAR”) ratio measuring below a prudent 1x, underscoring risks from the historically low transferability of capital across group subsidiaries in stressed scenarios. We, however, positively note the location of capital in Botswana through the recent transfer of ZEP-Re (PTA Reinsurance Company) shares worth c. USD3m and an External Claims Fund of up to USD5m (capitalised at c. USD2m at FY20) in the same country, which somewhat reduce solvency risk in regional subsidiaries.

Liquidity remained intermediate, albeit under pressure from the on take of the Fidelity Life book. The resultant strong growth in liabilities reduced the funded ratio of liabilities by investments to 2.0x (FY19: 5.9x). Given a high concentration to value preserving assets, liquidity pressures are viewed to be high, although offset by the liability book’s increased duration and better inflation hedge provided by these investments.

Earnings capacity registered a notable improvement, supported by stringent cost management, with the group’s operating expense ratio reducing to around 23.3% (FY19: 50.6%), and the trend observable in subsidiaries with high earnings risk, Zambia: (FY20: 48.5%; FY19: 73.3%) and Mozambique (FY20: 51.1%; FY18: 94.8%). Given additional cost cutting measures in Botswana through merging the licences of entities operating in that market and rationalisation of costs after the Fidelity Life acquisition in Zimbabwe, we expect cost suppression to stabilise medium-term earnings within a strengthened range across the group.

Outlook statement

The Stable Outlook reflects potential for improved operating efficiencies to reduce the risk of negative earnings eroding capitalisation and liquidity.

Rating triggers

The national scale rating may be upgraded if increased location of assets to lower risk jurisdictions supports premium growth in these markets and earnings improve on a sustainable basis to support the quality of capital. 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 group liquidity metrics measure below expectations.

Analytical contacts

Primary analyst Godfrey Chingono Deputy Sector Head: Insurance Ratings
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, September 2020
GCR Country Risk Scores, October 2021
GCR Insurance Sector Risk Scores, September 2021

Ratings history

Emeritus Reinsurance (Private) Limited

Rating class Review Rating scale Rating 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 October 2020
National A-(ZW) Evolving Outlook October 2020

Risk score summary

Rating components and factors Risk score
Operating environment 4.00
Country risk score 1.25
Sector risk score 2.75
Business profile 0.00
Competitive position (0.25)
Premium diversification 0.25
Management and governance 0.00
Financial profile (0.25)
Earnings (0.25)
Capitalisation 0.50
Liquidity (0.50)
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 3.75

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 entity. 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 2020;
  • Four years of group and company comparative audited financial statements to 31 December
  • Full year company budgeted financial statements for 2021;
  • Unaudited company interim results to 30 June 2021; 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 September 2021.

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