Johannesburg, 31 May 2018– Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to First Mutual Reinsurance Company Limited, formerly FM Re Property & Casualty (Private) Limited (“FM Re”) of BBB+(ZW), with the Outlook accorded as Stable. The rating is valid until May 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to First Mutual Reinsurance Limited (“First Mutual Re”) based on the following key criteria:
First Mutual Re’s capital base amounted to USD10.8m at FY17 (FY16: USD9.2m), supporting healthy risk adjusted capitalisation. Nonetheless, in absolute terms, the scale of the capital base is viewed to be moderate relative to regional competitors (given regional diversification targets). Over the medium term, risk adjusted capitalisation is expected to remain healthy, supported by sound internal capital generation catering for the quantum of insurance risks and market exposure. Furthermore, maximum net deductibles per risk and event are limited to conservative levels relative to capital, while the retrocession panel reflects an intermediate aggregated level of credit strength.
The liquidity profile remained within a moderately strong range, supported by healthy metrics and sound aggregated banking counterparty strength. In this respect, cash covered net technical provisions by 1.0x, while the claims cash cover ratio equated to 8 months at FY17 (FY16: 0.9x and 9 months respectively). Additional liquidity support is available from listed equities. Liquidity metrics may remain at similar levels over the rating horizon, underpinned by sound operating cash flow generation and envisaged asset allocation.
Earning capacity remained within a moderately strong range in FY17, supported by fair value gains offsetting deep underwriting deficits. In this respect, the reinsurer’s investment yield equated to a review period high of 35% (FY16: 10%; review period average: 11%), while the underwriting margin equated to -18% in FY17 (FY16: 2%; review period average: 4%). Deep underwriting deficits were largely due to pronounced losses relating to one large account in FY17. Subsequently, corrective action was taken, including introduction of a stop loss treaty in tandem with increased rates and enhanced underwriting disciplines. Accordingly, management expects the underwriting performance to revert to a moderately strong level.
First Mutual Re reflects a strong competitive position, underpinned by a comparatively high share of short term reinsurance industry gross premiums. In this regard, the reinsurer remained one of the dominant players in the local reinsurance market with an estimated 17% of total reinsurance industry premiums in FY17 (FY16: 19%). The reinsurer’s domestic market position is supported by strong relationships with cedants both local and regional. GCR expects the insurer to maintain its market position over the rating horizon.
GCR views country risk factors to be elevated, and a systematic rating consideration applicable to reinsurers. Operational challenges are likely to persist over the rating horizon, albeit with positive changes in the socio-political outlook and macroeconomic fundamentals possible over the medium term, should the political situation stabilise. Furthermore, the international scale rating is heavily constrained by sovereign risk, given that the bulk of assets are domiciled in Zimbabwe. While the country has no sovereign rating, it has previously defaulted on payments to international financial institutions.
Upward rating movement may follow sustained healthy levels of capitalisation together with prudent liquidity management and stabilisation in earnings capacity. Conversely, negative rating pressure pertains to sustained weakening in earnings capacity, reduction in capitalisation and/or deterioration in the reinsurer’s liquidity profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating post dollarisation (May 2009)|
|Claims paying ability: BBB+(ZW)|
|Last rating (July 2017)|
|Claims paying ability: BBB+(ZW)|
|Primary Analyst||Committee Chairperson|
|Zwivhuya Muvhenzhe||Yvonne Mujuru|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
First Mutual Re 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/RATING-SCALES-DEFINITIONS. 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 was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
First Mutual Reinsurance Company Limited participated in the rating process via teleconference management meetings and/or written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to First Mutual Reinsurance Company Limited with no contestation of the rating.
The information received from First Mutual Reinsurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to December 2017
- Four years of comparative audited numbers
- Unaudited year to date results to 31 March 2018
- Budgeted financial statements to December 2018
- 2018 retrocession cover notes
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|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.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a more detailed glossary of terms, please click here
GCR affirms First Mutual Reinsurance Limited’s rating of BBB+(ZW); Outlook Stable.