Johannesburg, 30 April 2019 – GCR Ratings has today affirmed the national scale claims paying ability rating of BBB(ZM) assigned to Emeritus Reinsurance Zambia Limited. Furthermore, GCR Ratings has affirmed the international scale claims paying ability rating assigned to Emeritus Reinsurance Zambia Limited of B-. The ratings have been maintained on Rating Watch and will be reviewed in July 2019.
SUMMARY RATING RATIONALE
GCR Ratings (“GCR”) has accorded the above credit ratings to Emeritus Reinsurance Zambia Limited (“Emeritus Re Zambia”) based on the following key factors:
The ratings have been maintained on Rating Watch given the continued pressure on solvency and liquidity metrics that developed during FY18. While an anticipated capital injection is expected to underpin a strengthening in key credit protection measures, GCR notes the protracted nature of the exercise and associated execution risk. In this respect, GCR will continue to monitor developments in terms of the timing and sufficiency of the anticipated capital raising, as well as the ability of the reinsurer to implement its turnaround strategy.
In light of industry wide premium collection challenges, Emeritus Re Zambia reflected a sharp increase in aged premium receivables at FY18, which resulted in a dilution in the adjusted international solvency margin, to 55% (FY17: 95%). 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 equating to approximately USD1.6m at FY18.
The rating outlook further considers the operational cash flow strain in FY18, which placed pressure on liquidity. In this regard, cash coverage of net technical liabilities lowered to 0.8x at FY18 (FY17: 1.5x), while coverage of average monthly claims equated to 11 months (FY17: 31 months). Accordingly, GCR notes the potential for liquidity to decrease in the absence of a sufficient cash injection.
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 deteriorated in FY18, following a spike in operating expenses and higher net claims experience, resulting in an underwriting margin of -27% (prior four year average: +0.6%). Given that certain expense items are viewed to be non-recurring, the reinsurer may revert to underwriting profitability in FY19, although this will be dependent on achieving expected cost savings and volume efficiencies. Accordingly, the reinsurer’s ability to achieve a sustained strengthening in earnings capacity represents 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 is reasonably well diversified, although note is taken of the limited premium scale in absolute terms, with net premiums equating to less than USD0.7m across all lines of business.
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 ratings reflect negative sensitivity to sustained pressure on capitalisation or liquidity in the absence of sufficient recapitalisation over the near term. A sustained strengthening in earnings that translates into enhanced internal capital and cash generative capacity may result in positive rating action over the medium term.
| 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 2018) | Last rating (December 2018) |
| Claims paying ability: BBB(ZM) | Claims paying ability: B- |
| Outlook: Rating Watch | Outlook: Rating Watch |
ANALYTICAL CONTACTS
| Primary Analyst |
| Susan Hawthorne |
| Senior Insurance Analyst |
| (011) 784-1771 |
| susanh@gcrratings.com |
| Committee Chairperson |
| Yvonne Mujuru |
| Sector Head: Insurance Ratings |
| (011) 784-1771 |
| ymujuru@gcrratings.com |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Zambian Reinsurance Company Limited rating reports, 2009 – 2017
Emeritus Reinsurance Zambia Limited rating report, 2018
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 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 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 Zambia Limited.
The information received from Emeritus Reinsurance Zambia Limited and other reliable third parties to accord the credit ratings included:
- Unaudited management accounts to 31 December 2018
- Four years of comparative financial statements to 31 December
- Budgeted financial statements for 2019
- 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. |
| 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 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. |
| 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
