Announcements Insurance Rating Alerts

GCR affirms FBC Re’s national scale A(ZW) and international scale CCC financial strength ratings

Rating action

Johannesburg, 29 September 2020 – GCR Ratings (“GCR”) has affirmed FBC Reinsurance Limited’s (“FBC Re”) national scale financial strength rating of A(ZW), with the Outlook revised to Evolving. Furthermore, FBC Reinsurance Limited’s international scale financial strength of CCC rating has been affirmed with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
FBC Reinsurance Limited Financial strength National A(ZW) Evolving Outlook
Financial strength International CCC Stable Outlook

Rating rationale

FBC Re’s national scale financial strength rating is primarily constrained by the relatively weaker assessment of FBC Holdings Limited’s (“the group”) credit profile. Furthermore, the evolving outlook captures the uncertainties in the operating environment including pressures emanating from the hyperinflationary environment, which is notably expected to maintain real earnings at subdue levels. Nevertheless, the reinsurer’s rating is characterised by a strong financial profile, underpinned by very strong liquidity and strong risk adjusted capitalisation, diluting the effects of a comparatively limited business profile.

Liquidity registered within a very strong range, attributed to a relatively superior asset selection, well hedging the investment portfolio against hyperinflation. Accordingly, coverage of net technical liabilities by cash and stressed financial assets equated to 2.7x (FY18: 2.6x), while operational cash coverage registered at 13 months (FY18: 10 months). However, liquidity assessment was negatively impacted by the lack of banking counterparty diversification, compounding exposures to the group. Liquidity is expected to remain within a similar range going forward, given the insurer’s strategy to maintain the current asset allocation in line with management’s liquidity strategy.

Risk adjusted capitalisation measured within a strong range, supported by internal capital generation, despite erosion of the capital base, due to hyperinflation worsening after the change in the functional currency. In this regard, the GCR capital adequacy ratio registered at 2.5x (FY18: 2.0x; FY17: 5.2x), whilst the capital base in real terms amounted to USD5.7m (FY18: USD15.8m). Going forward, risk adjusted capitalisation could remain within strong range, although potential moderation may result from costs pressures outweighing premiums’ growth targets.

Earnings was viewed to be credit negative, with monetary losses (FY19: ZW119m; FY18: ZWL31m) due to hyperinflationary pressures offsetting sound underwriting margins. In this respect, the reinsurer net loss after tax deepened to ZWL43m (FY18: ZWL22m loss), despite a favourable claims experience supporting underwriting margin at the review period high of 15% (FY18: 2%; review period average: 9%). However, additional earnings pressures are expected to emanate from the reinsurer’s cost base over the medium term, with claims reverting to historical levels following reviews of sum insured, whilst hyperinflation is expected to result in a spike in operating expenses (6MFY20: 105%; FY19: 29%; review period average: 24%). Therefore, the ability of the reinsurer to manage earnings within rating sufficient levels will represent a key consideration.

The business profile remained moderate, given geographic concentration to the primary market compared to peers (99% of premiums are derived from Zimbabwe), and product concentration to two lines of business (representing 85% and 80% of gross and net premiums respectively). In addition, cognisance is taken of the reduction in scale following the change in functional currency, with the premium base amounting to a lower USD10.6m (FY18: USD22.5m). The business profile is expected to remain unchanged going forward.

Outlook statement

GCR expects earnings pressures to persist due to an increased cost base resulting into loss of scale efficiencies, negatively impacting risk adjusted capitalisation, while liquidity is maintained within a very strong range. The business profile is expected to remain within a similar range.

Rating triggers

Downward rating movement could result from sustained weakening of earnings which may bear negatively on earnings and risk adjusted capitalisation. Furthermore, a reduction in the group’s overall credit profile is likely to exert negative rating pressure on FBC Re. Conversely, reversion to a Stable Outlook may follow a sustained improvement in earnings to historic levels.

Analytical contacts

Primary analyst Linda Matavire Analyst: Insurance Ratings
Johannesburg, ZA LindaM@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@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

Ratings history

FBC Reinsurance Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(ZW) Evolving May 2009
Initial International B Stable August 2012
Financial strength Last National A(ZW) Stable Outlook August 2019
Last International CCC Stable August 2019

Risk score summary

Rating components and factors Risk scores
Operating environment 2.75
Country risk score 0.00
Sector risk score 2.75
Business profile (1.75)
Competitive position (0.75)
Premium diversification (1.00)
Management and governance 0.00
Financial profile 3.75
Earnings 0.50
Capitalisation 1.50
Liquidity 1.75
Comparative profile (1.00)
Group support (1.00)
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.
Primary Market The part of the capital markets that deals with the issuance of new securities.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
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.
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.
Sum Insured The maximum amount that an insurer will pay under a contract of insurance.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.

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 were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were 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 above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. 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 rated entity and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2019;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2020;
  • Unaudited interim results to 30 June 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.

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