Announcements

GCR affirms MOZRE Mocambique Resseguros, S.A’s rating of BBB-(MZ); Outlook Negative.

Johannesburg, 5 August 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to MOZRE Mocambique Resseguros, S.A of BBB-(MZ), with the rating outlook accorded as Negative. Furthermore, Global Credit Ratings has downgraded the international scale claims paying ability rating assigned to MOZRE Mocambique Resseguros, S.A to B-, with the outlook accorded as Negative. The ratings are valid until June 2017.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to MOZRE Mocambique Resseguros, S.A (“Moz Re”) based on the following key criteria:

The negative outlook reflects the potential for downward rating action, resulting from a potential weakening in capitalisation due to premium debtor write-offs. Premium debtors exceeding 180 days rose to MZN112m as at July FY16 (FYE15: MZN62m), pressured by existing economic and liquidity conditions faced by counterparties (which are likely to persist over the remainder of the year). Aged debtors correspond to a high 84% of YTD16 capital, representing a key risk to be managed by the reinsurer, and a key consideration for GCR, over the rating horizon. Positively, paid-in capital rose to MZN101m at FYE15 (FYE14: MZN75m), following the impact of foreign translation gains on retained earnings, coupled with the capital receipt of MZN9m (in partial receipt of the MZN33m committed capital injection). This resulted in a rise in the international solvency margin to 68% at FYE15 (FYE14: 48%), with the solvency margin budgeted at 58% at FYE16.

Moz Re’s earnings capacity is considered to be intermediate, with the review period average underwriting margin equating to 3%. The reinsurer has registered a volatile earnings trend over the review period, with the limited premium base exposing underwriting results to potential fluctuations (from unexpected cost pressures in particular). This was highlighted in FY15, whereby the spike in the operating expense ratio (FY15: 70% vs. FY14: 39%) due to higher bad debt write offs and provisions, resulted in an underwriting deficit of MZN26m. GCR expects margin compression and volatility to persist over the rating horizon, given sustained earnings risk from subdued net premium volumes, as well as potential operating expense elevation.

Buoyed by the MZN25m forex gains on foreign denominated deposits and MZN9m capital injection, cash and equivalents increased by 42% to MZN91m at FYE15. Accordingly, liquidity metrics strengthened at FYE15, with claims cash coverage and cash coverage of net technical liabilities amounting to a strong 25 months and 1.1x respectively at FYE15 (review period average: 22 months and 0.8x respectively). Over the short term, a moderation in liquidity metrics is expected, given the anticipated operating cash flow strain.

Moz Re reflects a modest competitive position, with the reinsurer’s balance sheet size and premium levels in absolute terms viewed to be comparatively limited in the context of the regional reinsurance market. However, note is taken of the reinsurer’s position as the only licensed reinsurer operating in Mozambique, while Moz Re is also part of a larger group, which provides access to technical support and expertise. The reinsurer’s earnings are fairly well-diversified, with all lines of business representing a meaningful share of the total gross premium base, underpinning a moderately stable business profile. The majority of Moz Re’s retrocession programme is placed with high- to mid-rated entities, while the maximum net retention per risk and event is viewed to be moderate at 4.7% of FYE15 capital.

The international scale rating downgrade reflects the weakening in the sovereign credit rating to CCC or below, with the outlook maintained on negative.

Downward rating action may result from a weakening in capitalisation due to premium collection, and/or a deterioration in operating performance and key liquidity metrics. Upward movement of the rating could arise from a substantial strengthening in capitalisation, and/or de-risking of the balance sheet. This would need to be supported by sustained underwriting profitability and strengthened working capital management.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATINGS HISTORY
     
Initial rating (March 2011)   Initial rating (March 2011)
Claims paying ability: BBB-(MZ)   Claims paying ability: B
Outlook: Stable   Outlook: Stable
     
Last rating (August 2015)   Last rating (August 2015)
Claims paying ability: BBB-(MZ)   Claims paying ability: B
Outlook: Stable   Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Vinay Nagar
Credit Analyst
(011) 784-1771
vinay@globalratings.net
 
Committee Chairperson
Marc Chadwick
Sector Head: Insurance Ratings
(011) 784-1771
chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2015

Moz Re rating reports, 2011-2015

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.


GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Bad Debt Amounts in arrears, i.e. overdue, and often classified as defaulted or written-off.
Balance Sheet Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
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.
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.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Coverage The scope of the protection provided under a contract of insurance.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
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.
Net Retention The amount of insurance that a ceding company keeps for its own account and does not reinsure.
Operating Expense Ratio Measures the proportion of operating expenses in net premiums earned.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
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.
Retained Earnings Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.
Retention The net amount of risk the ceding company keeps for its own account.
Retrocession The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
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.
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 Result The profit or loss that an insurer derives from providing insurance or reinsurance coverage, exclusive of investment income and other income.
Working Capital Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.

For a detailed glossary of terms, please click here

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.

MOZRE Mocambique Resseguros, S.A 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 has been disclosed to MOZRE Mocambique Resseguros, S.A with no contestation of the rating.

The information received from MOZRE Mocambique Resseguros, S.A and other reliable third parties to accord the credit rating included:

  • Audited financial results to 31 December 2015
  • Four years of comparative numbers
  • Unaudited interim results to 31 May 2016
  • Budgeted financial statements for 2016
  • Other related documents

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings

GCR affirms MOZRE Mocambique Resseguros, S.A’s rating of BBB-(MZ); Outlook Negative.

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