Announcements Insurance Rating Alerts

GCR affirms First Mutual Reinsurance Company Limited’s national scale financial strength rating of BBB(ZW); Rating Watch Positive

Rating action

Johannesburg, 16 October 2020 – GCR Ratings (“GCR”) has affirmed First Mutual Reinsurance Company Limited’s (“First Mutual Re”) national scale financial strength rating of BBB(ZW). The rating has been placed on Rating Watch Positive.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

First Mutual Reinsurance Company Limited

Financial strength

National

BBB(ZW)

Rating Watch Positive

Rating rationale

First Mutual Re’s rating is anchored by sound capitalisation and liquidity. Nevertheless, the reinsurer’s vulnerable earnings profile along with a modest business position in the context of regional markets of presence are contributing rating negatives. A transaction involving a material capital injection, and the associated favourable impact this will likely have on risk adjusted capitalisation and liquidity underpins the Rating Watch Positive. The capital is expected to be in over the next 3 – 6 months.

First Mutual Re’s liquidity profile improved on the back of growth in the liquid asset pool. This was further bolstered by a significant reduction in net technical liabilities given the cemented and contractual nature of these obligations in an inflationary environment. In this respect, cash and equivalents increased to ZWL55m at FY19 (FY18: ZWL34m), while the value of net technical liabilities contracted by 45% to ZWL27m. Accordingly, the liquidity ratio equated to 2.7x at FY19 (FY18: 1.2x), while cash and stressed financial assets coverage of operational cost requirements improved to 7 months (FY18: 3 months).

Risk adjusted capitalisation significantly reduced on the back of material inflation-adjusted losses reported in FY19. Responding to this deterioration, shareholders injected capital amounting to ZWL40.1m during the first half of FY20. This, together with recent reversion to net profitability resulted in the reinsurer’s inflation-adjusted capital base strengthening to ZWL174m at 1H F20 (FY19: ZWL21m), while GCR capital adequacy requirement (“CAR”) coverage recovered to 1.5x (FY19: 0.5x). Looking ahead, the reinsurer’s risk adjusted capitalisation may improve further should the expected capital injection flow through as planned.

The rating considers earnings weakness between FY17 and FY19, with the reinsurer registering inflation-adjusted losses at both underwriting and net level over the past two years. Elevated (albeit improving) claims experience remained a driver underpinning underwriting losses, with the loss ratio averaging 59% over the past three years compared to an average of 47% registered over the prior two-year cycle. Furthermore, review year underwriting performance was adversely impacted by a reduction in scale, attributable to increased cessions, with commission recoveries insufficient to offset the reduction in the earned premium base. Accordingly, First Mutual Re reported underwriting deficits totalling ZWL29m over the past three years, translating to an aggregate underwriting margin of -14.5% over the corresponding period. Underwriting pressure was exacerbated by significant fair value losses on the equity portfolio over the past two years, as well as review year foreign currency losses amounting to ZWL12.8m. Resultantly, bottom line performance deteriorated, with the reinsurer closing at a loss position of ZWL50m (FY18: ZWL13m loss) after tax, on an inflation-adjusted basis. While underwriting losses are continuing into the current year (1H F20: underwriting margin -58%), reversion to net profitability was observed, driven by fair value and monetary gains. In this regard, overall earnings performance is expected to continue to be better than in FY19 on the back of investment in value preserving assets.

The business profile continues to be a rating negative. While the reinsurer’s competitive strength in the local market is evident, despite review year reduction in market share metrics, First Mutual Re remains a fringe player in other regional markets of presence. In the local market space, the reinsurer’s share of total short and long-term market cessions halved to 8% (FY18: 16%) partly due to slower than industry growth and to a larger extent, ongoing distortions in the market following the change in functional currency and the ensuing depreciation of the local unit. A further constraint to the reinsurer’s business position is limited premium spread. Despite having three product lines materially contributing to the overall premium base, the assessment is negatively impacted by elevated concentration to the primary market, with 99% of premiums written locally.

The rating derives support from First Mutual Holdings Limited (“the group”), the reinsurer’s ultimate parent company, given evidence of strategic and operational integration.

Outlook statement

The Positive Rating Watch reflects potential rating upside should the anticipated capital injection come through as intended. In this respect, post the transaction, risk adjusted capitalisation may strengthen, with GCR CAR projected to measure above 1.7x, although the capital base could remain limited in absolute USD terms. The capital injection is also expected to bolster liquidity, with the liquidity ratio projected to measure above 3.0x while cash and stressed financial assets coverage of operational cost requirements could exceed 12 months. Although underwriting performance may remain suppressed due to operating cost pressures, the recently observed reversion to net profitability is likely to be supported by fair value gains going forward given the hyperinflationary environment.

Rating triggers

Upward rating progression may follow an improvement in risk adjusted capitalisation and liquidity in line with projections post the capital injection. This would need to be accompanied by maintenance of the business profile within the current assessment level. Conversely, the rating may be downgraded should earnings and the business profile deteriorate below expectations.

Analytical contacts

Primary analyst

Tichaona Nyakudya

Senior Analyst: Insurance

Johannesburg, ZA

TichaonaN@GCRratings.com

+27 11 784 1771

     

Committee chair

Susan Hawthorne

Senior Analyst: Insurance

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

First Mutual Reinsurance Company Limited

Rating class

Review

Rating scale

Rating

Outlook / Watch

Date

Claims paying ability

Initial

National

BBB+(ZW)

Evolving Outlook

May 2009

Financial strength

Last

BBB(ZW)

Stable Outlook

October 2019

Risk score summary

Rating components & 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

1.00

Earnings

(1.00)

Capitalisation

1.00

Liquidity

1.00

   

Comparative profile

1.00

Group support

1.00

Government support

0.00

Peer analysis

0.00

   

Total score

3.00

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.

SALIENT POINTS OF ACCORDED RATING

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated entity. The rating was 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 entity and other reliable third parties to accord the credit rating included:

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