Johannesburg, 29 November 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Prima Reinsurance Plc of A-(ZM), with the outlook accorded as Negative. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Prima Reinsurance Plc of B, with the outlook accorded as Negative. The ratings are valid until November 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Prima Reinsurance Plc (“Prima Re”) based on the following key criteria:
The negative outlook considers the moderation in Prima Re’s underwriting profitability over the review period, with the escalation in the operating expense base contributing towards reduced underwriting headroom. Despite the relative stabilisation in performance in FY16 (with the prior year having been impacted by significant currency depreciation), GCR expects underwriting profitability to continue to trail the strong double digit margins posted at the start of the review period, with net profitability metrics expected to lower to moderately strong levels from the strong levels evidenced historically. Accordingly, the ratings are sensitive to potential for earnings pressure to persist, to the extent that this results in a deterioration in the reinsurer’s overall credit profile.
In this regard, Prima Re reflects a very strong level of risk adjusted capital adequacy, which is viewed to cater for a degree of cross cycle underwriting strain, given the current level of underwriting risk and limited market risk. GCR expects risk adjusted capitalisation to remain very strong over the outlook horizon, albeit potentially exposed to a moderation in the event of a dilution in earnings generation. The rating further considers the limited capital base in absolute terms (in the context of the regional insurance market), with total capital equating to around USD4.2m at FY16 (FY15: USD3.6m). The majority of retrocession arrangements are placed with counterparties of sound credit quality, while per risk and event treaty deductibles are limited to moderately conservative levels relative to the capital base.
Liquidity metrics continued to register at very strong levels, with cash coverage of average monthly claims and net technical liabilities equating to 31 months and 3.7x respectively at FY16 (FY15: 36 months and 3x). GCR nevertheless notes the potential for increasing cash flow strain in the wake of industry wide premium collection challenges, which could see a moderation in liquidity over the outlook horizon.
Prima Re’s competitive position is viewed to be intermediate, given the fairly limited participation in total domestic market cessions. This is partially offset by the reinsurer’s domestic market position, which is supported by the company’s established presence and brand. The reinsurer’s business mix is relatively well diversified, with four lines of business each contributing more than 10% of gross and net premiums. Note is, however, taken of the limited premium scale in absolute terms, with most lines of business generating less than USD0.5m in net premiums.
The international scale rating continues to be impacted by Zambia’s sovereign credit profile, given that the bulk of the reinsurer’s assets are domiciled locally, while the majority of business is sourced domestically.
Negative rating action may be taken if earnings pressure persists at a level that adversely impacts the reinsurer’s overall credit profile. Furthermore, the rating is sensitive to a weakening in liquidity stemming from continued premium collection challenges. In contrast, positive rating action could follow a sustained strengthening in earnings capacity. This would need to be accompanied by stability in other key credit protection measures.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING|
|Initial rating (September 2009)||Initial rating (November 2011)|
|Claims paying ability: BBB+(ZM)||Claims paying ability: B|
|Outlook: Positive||Outlook: Stable|
|Last rating (December 2016)||Last rating (December 2016)|
|Claims paying ability: A-(ZM)||Claims paying ability: B|
|Outlook: Negative||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|Senior 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 July 2017.
Prima Re rating reports, 2009 – 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 was influenced by any other business activities of the credit rating agency; b.) the ratings was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Prima Reinsurance Plc 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 Prima Reinsurance Plc with no contestation of the ratings.
The information received from Prima Reinsurance Plc and other reliable third parties to accord the credit ratings included:
- Audited financial statements to 31 December 2016
- Four years of comparative financial statements to 31 December
- Budgeted financial statements to 31 December 2017
- Year to date management accounts to 30 September 2017
- The current year retrocession treaties
- Other relevant company specific information
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.|
|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.|
|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.|
|Cession||Amount of the insurance ceded to a reinsurer by the original insuring company (cedant) in a reinsurance transaction.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|Total Capital||The sum of owner’s equity and admissible supplementary capital.|
|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.|
For a detailed glossary of terms, please click here