Johannesburg, 1 August 2017 — 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 maintained on Negative. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating of B- assigned to MOZRE Mocambique Resseguros, S.A, with the outlook maintained on Negative. The ratings are valid until June 2018.
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 Moz Re’s capitalisation remaining at suppressed levels, while rising capital risk continues to stem from aged debtor exposure. With respect to the former, outstanding share purchases of MZN24m have persisted over the past two years, exclusive of which, capital equated to MZN123m at FY16. Furthermore, aged debtors amounted to a high MZN46m at FY16, and have risen further to MZN71m as at 1Q FY17. Consequently, excluding outstanding capital and aged debtors, the international solvency margin equated to a very low 37% at FY16, lowering further to 32% for 1Q F17. Note is also taken of the limited scale of the capital base in USD terms (USD1.7m, excluding outstanding capital commitments), and high unrealised investment gains (cumulatively amounting to MZN108m by FY16) underpinning asset quality. Management has indicated that outstanding capital is still expected to be received by the end of FY17. However, GCR views a high degree of execution risk to persist in terms of such capital receipt. Further challenges in premium collections and weakened earnings could result in some capital erosion over the short to medium term.
Earnings capacity exhibits a high degree of volatility, underpinned by highly variable underwriting profitability and unrealised movements supporting investment income. As such, the underwriting margin remains highly sensitive to fluctuating claims and cost ratios, given the limited scale of the net premium base. This was highlighted over the past two years, with the rise in operating expenses and claims having a significant negative impact on underwriting performance, with the underwriting margin registering at a very low -44% in FY16
(FY15: -19%). Although Moz Re continues to report consistent net profits, the quality of earnings is viewed to have weakened over the past two years, with unrealised forex gains and revaluation gains propping up the net result. Earnings are expected to remain weak over the short term, with persistently high bad debt write offs constraining underwriting profitability.
There was a noticeable weakening in liquidity metrics in FY16, with cash coverage of monthly claims and technical liabilities amounting to a lower 8 months and 0.6x respectively at FY16 (FY15: 20 months and 0.8x respectively). This followed the marked increase in claims (135%), coupled with limited organic cash flow generation during the year, which saw cash and equivalents decline by 9% to MZN66m. The situation was further compounded by persistent premium collection challenges, with a large portion of total assets tied up in non-income generating receivables. The issue is unlikely to be resolved over the short term, with liquidity expected to register at a moderately weak level, albeit the anticipated normalisation in claims may alleviate some liquidity pressure in FY17.
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 Moz Re’s affiliation to the larger group, which provides access to technical support and expertise. Furthermore, 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 counterparties displaying an intermediate level of aggregate strength, while the maximum net retention per risk and event is viewed to be moderate at 4.9% of FY16 capital.
The international scale rating is constrained by the weakening in the sovereign credit rating to CC or below, with the outlook maintained on negative.
Downward rating action may result from capitalisation remaining at supressed levels, given limited scale and existing exposures. Negative rating pressure may also be associated with continued liquidity and earnings constraints. 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|
|Initial rating (March 2011)|
|Claims paying ability: BBB-(MZ)|
|Last rating (July 2016)|
|Claims paying ability: BBB-(MZ)|
|INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (March 2011)|
|Claims paying ability: B|
|Last rating (July 2016)|
|Claims paying ability: B-|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Moz Re rating reports, 2011-2016
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.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were 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.
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 have been disclosed to MOZRE Mocambique Resseguros, S.A with no contestation of the ratings.
The information received from MOZRE Mocambique Resseguros, S.A and other reliable third parties to accord the credit ratings included:
- The audited financial statements to 31 December 2016
- Four years of comparative audited financial statements
- Full year budgeted financial statements to 31 December 2017
- Unaudited interim results to 31 May 2017
- Other relevant 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.
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.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|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.|
|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.|
|Downgrade||The assignment of a lower credit rating to an insurer by a credit rating agency. Opposite of upgrade.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|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 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.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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. 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.|
|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.|
|Revaluation||Formal upward or downward adjustment to assets such as property or plant and equipment.|
|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 Margin||Measures efficiency of underwriting and expense management processes.|
|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
GCR affirms MOZRE Mocambique Resseguros, S.A’s rating of BBB-(MZ); Outlook Negative.