Johannesburg, 24 December 2018 — Global Credit Ratings has today affirmed Emeritus Reinsurance Zambia Limited’s (formerly Zambian Reinsurance Company Limited) national scale claims paying ability rating of BBB(ZM). Furthermore, Global Credit Ratings has downgraded Emeritus Reinsurance Zambia Limited’s international scale claims paying ability rating to B- from B. The ratings have been placed on Rating Watch and will be reviewed in April 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Emeritus Reinsurance Zambia Limited (“Emeritus Re Zambia”) based on the following key factors:
The national scale rating was affirmed following a capital injection in FY17 that underpinned a strengthening in risk adjusted capitalisation and liquidity, in line with expectations. However, subsequent to year end, the reinsurer has been impacted by industry-wide premium collection challenges and a weakening in earnings. Accordingly, the ratings have been placed on Rating Watch and GCR will monitor the impact of these factors on key credit protection metrics over the next three to four months. The negative rating action on the international scale rating is a function of adverse developments with respect to Zambia’s sovereign credit profile.
Emeritus Re Zambia reflected a strengthened level of risk adjusted capitalisation at FY17, following a large cash injection from shareholders. After adjusting for aged premium receivables, the international solvency margin increased to 95% at FY17 from the very low 24% reflected at FY16. Note is, however, taken of the sharp increase in aged premium receivables subsequent to year end, which resulted in a dilution in the adjusted international solvency margin, to 60% at 8M F18. In this regard, risk adjusted capitalisation may continue to weaken in the wake of continued premium collection challenges and recent earnings strain. The assessment further considers the limited capital base in absolute terms (in the context of the regional reinsurance market), with total capital currently equating to approximately USD1.7m.
Similarly, liquidity metrics increased on the back of the cash injection, with cash coverage of net technical liabilities and average monthly claims equating to 1.5x and 31 months respectively at FY17 (FY16: 0.5x and 7 months). The rating outlook nevertheless considers the operational cash flow strain subsequent to year end, which placed pressure on liquidity. In this regard, cash coverage of technical liabilities lowered to 0.9x at 8M F18, while coverage of average monthly claims equated to 15 months. Accordingly, GCR notes the potential for liquidity to decrease to an intermediate level from the sound levels at FY17.
Emeritus Re Zambia’s cross cycle earnings capacity is viewed to be weak, with the reinsurer registering underwriting losses in four of the past five years. Underwriting profitability strengthened in FY17 following low claims experience, although is expected to realign with the prior four year cycle given a subsequent spike in claims and reduction in cost efficiencies. Furthermore, net profitability has been exposed to exchange rate volatility in recent years, with the five year average return on NEP equating to 0.5% (FY17: 8%). Going forward, underwriting profitability remains susceptible to volatility stemming from an elevated expense base and higher recent claims experience, with the reinsurer having posted a net loss of ZMW2m in 8M F18. Accordingly, the ability of the reinsurer to achieve a sustained strengthening in earnings capacity is likely to be a key rating consideration.
Emeritus Re Zambia’s competitive position is viewed to be limited by intensification of competition from regional reinsurers (in the absence of comparable local content legislation) and fairly low participation in total primary market cessions. The business mix continued to be well diversified, with four lines of business contributing more than 10% of gross and net premiums. Note is, however, taken of the limited premium scale in absolute terms, with net premiums equating to less than USD0.7m across all lines of business.
The highest net deductible per risk and event equated to a moderately conservative 4% of capital at FY17, although the aggregate credit profile of the retrocession panel is weighed down by the fact that one participant is currently in run-off. Management nevertheless advises that there are no amounts owed by or outstanding claims recoveries from this entity.
The international scale rating continues to be impacted by Zambia’s sovereign credit profile, given that the reinsurer’s assets are domiciled locally, while the majority of business is sourced domestically.
The rating is highly sensitive to a further weakening in risk adjusted capitalisation or liquidity in the absence of recapitalisation. Furthermore, a reduction in the absolute capital base could result in negative rating action if this triggers regulatory action. Positive rating action may follow a sustained strengthening in earnings that translates into enhanced internal capital and cash generative capacity.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2009)||Initial rating (November 2009)|
|Claims paying ability: BBB+(ZM)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2017)||Last rating (December 2017)|
|Claims paying ability: BBB(ZM)||Claims paying ability: B|
|Outlook: Stable||Outlook: Negative|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Zambian Reinsurance Company Limited rating reports, 2009 – 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 rating process 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 Zambia Limited participated in the rating process via 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 Zambia Limited.
The information received from Emeritus Reinsurance Zambia Limited and other reliable third parties to accord the credit ratings included:
- Audited financial statements to 31 December 2017
- Four years of comparative financial statements to 31 December
- Unaudited management accounts to 31 August 2018
- Budgeted financial statements for 2018
- 2018 retrocession cover notes
- 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cession||Amount of the insurance ceded to a reinsurer by the original insuring company (cedant) in a reinsurance transaction.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Downgrade||The assignment of a lower credit rating to an insurer by a credit rating agency. Opposite of upgrade.|
|Exchange Rate||The value of one country’s currency expressed in terms of another.|
|International Scale Rating LC||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.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Net Loss||The amount of loss sustained by an insurer after giving effect to all applicable reinsurance, salvage, and subrogation recoveries.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|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.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
|Total Capital||The sum of owner’s equity and admissible supplementary capital.|
|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.|
For a detailed glossary of terms please click here
GCR affirms Emeritus Reinsurance Zambia Limited’s rating of BBB(ZM); Rating Watch