Announcements

GCR affirms Prima Reinsurance Plc’s rating of A-(ZM); Outlook Stable.

Johannesburg, 04 Dec 2015 — 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 Stable. 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 Stable. The ratings are valid until November 2016.

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 reinsurer reflects strong levels of capital adequacy on a risk adjusted basis, underpinned by a capital injection in FY13 and sound internal capital generation. The adjusted international solvency margin remained strong at 161% at FYE14 (FYE13: 201%), after netting off premium debtors in excess of 180 days. Nevertheless, the capital base is comparatively limited in absolute terms (USD6m), in the context of the regional insurance market.

Liquidity metrics remained very strong, with the claims cash coverage ratio equating to 41 months in FY14 (FY13: 56 months), and cash coverage of net technical liabilities equating to an unchanged 6x. Very strong liquidity metrics were supported by the capital injection which was largely placed in liquid funds. Going forward, GCR expects liquidity metrics to remain within a strong range, underpinned by the reinsurer’s conservative investment strategy, which focuses on maintaining the bulk of invested assets in liquid investments.

GCR expects Prima Re to return to underwriting profitability through the medium term, albeit that the reinsurer is expected to record thinner underwriting margins compared to the historical exceptionally high levels (which were underpinned by unsustainably low claims incurred). In this respect, claims incurred have started to trend upwards (2-year average net incurred loss ratio: 27%), albeit measuring below the domestic peer’s average net incurred loss ratio of 43% over the corresponding period.

Prima Re’s business profile is moderately strong, underpinned by its domestic market position. In this regard, the reinsurer is one of two locally domiciled players in the Zambian market, standing to benefit from close to market presence, albeit with somewhat limited balance sheet capacity.

In addition, the reinsurer has a fairly diversified business mix, with earnings fairly spread across four lines of business, each contributing more than 10% to gross premiums. This notwithstanding, cognisance is taken of the relatively subdued contribution thereof in absolute terms, resulting in premium levels that are limited in the context of other regional players.

Retrocession represents a moderately strong rating factor. The programme is largely placed with retrocession counterparties with an intermediate aggregate level of rating strength. The net deductible per risk and event is viewed to be moderately conservative. The rating continues to bear potential negative exposure to Zambia’s sovereign credit profile which has deteriorated over the past 12 months.

The rating may be upgraded if the reinsurer’s balance sheet capacity strengthens materially, coupled with a substantial improvement in the business profile (by way of increased regional market share and enhanced premium scale in key lines of business). This would need to be supported by strict underwriting disciplines and liquidity metrics remaining within a strong range. Conversely, negative rating pressure could arise from a sustained weakening in earnings capacity and capitalisation, coupled with deteriorating liquidity metrics below expectations.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (September 2009)   Initial rating (November 2011)
Claims paying ability: BBB+(ZM)   Claims paying ability: B
Outlook: Positive   Outlook: Stable
     
Last rating (December 2014)   Last rating (December 2014)
Claims paying ability: A-(ZM)   Claims paying ability: B
Outlook: Stable   Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Yvonne Masiku   Catherine Zimba
Senior Credit Analyst   Junior Credit Analyst
(011) 784-1771   (011) 784-1771
ymasiku@globalratings.net   catherinez@globalratings.net
     
Committee Chairperson    
Marc Chadwick    
Sector Head: Insurance Ratings    
(011) 784-1771    
chadwick@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies, updated July 2015

Prima Reinsurance Plc rating reports, 2009-2014

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 are 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 rating.

The information received from Prima Reinsurance Plc and other reliable third parties to accord the credit ratings included:

  • The latest available audited annual financial statements up to 31 December 2014
  • Four years of comparative audited numbers
  • Full year detailed budgeted financial statements for 2015
  • Most recent year to date management accounts to 30 September 2015
  • The current year retrocession cover notes, and
  • 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.

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

Accounting A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
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.
Capital Base The issued capital of a company, plus reserves and retained profits.
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.
Credit Rating Agency An entity that provides credit rating services.
Creditworthiness An assessment of a debtor’s ability to meet debt obligations.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
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.
Interest Money paid for the use of money.
Liquidity The speed at which assets can be converted to cash.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
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”) The national scale rating 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.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
Policyholder The person in actual possession of an insurance policy.
Portfolio (1) All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. (2) The collection of financial assets constituting an entity’s investment portfolio.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Rating Outlook A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
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.
Securities Various instruments used in the capital market to raise funds.
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 more detailed glossary of terms/acronyms, please click here

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