Johannesburg, 14th June 2021 – GCR Ratings (“GCR”) has affirmed Tropical Reinsurance Company Limited’s (“Tropical Re”) international scale financial strength rating of CCC, with a Stable Outlook. At the same time, GCR affirmed Tropical Re’s national scale financial strength rating of BBB+(ZW), with the Outlook revised to Stable, from Evolving.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Tropical Reinsurance Company Limited||Financial strength||International||CCC||Stable Outlook|
Tropical Re’s ratings balance the reinsurer’s high-risk operating environment, a developing business profile and relative resilience in the financial profile. Despite challenging trading conditions in the primary market, characterised by hyperinflation, the reinsurer maintained an upward progression in market status and healthy through-the-cycle earnings. Furthermore, a relatively solid balance sheet supported moderately strong risk adjusted capitalisation and intermediate liquidity, albeit highly sensitive to unstable macroeconomic and sector dynamics. However, we believe that sustained earnings strength could, to a degree, provide sufficient buffers to absorb downside risks from the environment; hence, the change in the Outlook to Stable.
Earnings capacity is credit positive, supported by solid underwriting performance. Accordingly, underwriting margins averaged above 10% on an inflation adjusted basis and in USD terms over the past two years, largely underpinned by a competitive operating expense ratio of below 20%. Furthermore, the loss ratio has been well contained around 50% despite an elevation in the tobacco hail loss ratio in FY20, with losses at net level limited by a conservative deductible on the stop loss treaty. Investment income provides limited margin uplift, especially due to stable valuations on investment properties in real terms and limited, albeit growing, liquid investments. Going forward, we expect the earnings assessment to remain within the current range, with potential for an improvement as medium-term margin predictability increases.
The reinsurer’s capital base increased to c. USD4.0m at FY20 (FY19: c. USD3.0m), using USD management accounts, on the back of healthy internal capital generation. Congruently, the GCR capital adequacy ratio (“CAR”) measured within a moderately strong range of 150% to 200% on an inflation adjusted basis. Going forward, we expect the GCR CAR to stabilise within the current band over the medium term, reflecting increasing capital requirements from growing underwriting risk exposures. The containment of capital adequacy metrics above 150% is, therefore, contingent upon the quality of onboarded risks and credit risk management capabilities as the reinsurer pursues strategic premium growth targets, representing a key rating input over the medium term.
Liquidity is assessed within an intermediate range, supported by strong cash generation from operations, albeit with the investment portfolio still significantly weighted towards investment property. Positively, sound operating cash flows (reflecting limited absorption from receivables) were entirely invested in liquid assets, resulting in the dilution of real estate exposure to 37.5% of invested assets at FY20 (FY19: 65.6%). In this respect, cash and stressed financial assets coverage of net technical liabilities and operating requirements was sustained above 3x and within a 4 to 6 months range respectively at FY20. We believe liquidity metrics could be sustained within the current range if the strategy to liquidate select investment properties and invest in prescribed assets, augmented by continued conservative investing of operating cash flows, is well executed over the medium term.
Tropical Re maintained a healthy competitive profile, underpinned by a resilient captive book from cedants within the Nzou Holdings Ltd group (the reinsurer’s parent and its subsidiaries, including three cedants in Zimbabwe and Zambia). The predominantly hard currency premium base relative to peers in the primary market secured a recovery in the reinsurer’s participation on industry cessions to 11.0% (FY19: 8.5%; FY18: 10.8%), while accounting for a stable 15% of reinsurance industry gross premiums when premiums written from external markets are included. This is somewhat tempered by a modest, albeit stable participation (less than 3%) on aggregate primary insurer cessions in Zambia. Management expects gross premiums to increase in line with double digit annual growth rate targets (13.5% growth in USD during 1Q F21). In our view, the internally targeted growth rate is expected to maintain competitiveness over the medium term, given fairly successful growth strategy execution.
Premium diversification is intermediate. The product mix is spread among three material lines with moderately low aggregate product risk. Reflecting reinsurance norms, property is the foremost line of business at a share of 42.8% (FY19: 55.8%), diluted by material exposures to motor and agriculture risks. Geographic presence is a slight credit positive relative to domestic peers, with premiums diversified across two significant markets, albeit evidencing high cedant concentration. The top two cedants accounted for 84% of gross premiums in FY20, with concentration risk somewhat moderated by in-place captive arrangements. While noting management efforts to diversify the cedant base, we expect trade-offs from revenue security and reciprocal business dynamics to maintain a largely stable premium structure over the medium term. Furthermore, the reinsurer’s business focus on high-risk markets, characterised by elevated inflation and exchange rate risks, constrains the operating environment assessment.
The Stable Outlook is premised on prospects of sustained business profile stability, assuming that gross premium growth is likely to be aligned with that of peers as risks in the industry correctly reprice in real terms. The financial profile assessment is likely to remain unchanged over the medium term, considering potential for consistency in earnings strength to cushion capitalisation and liquidity metrics from downside risks. In this respect, the GCR CAR is expected to remain within the 150% to 200% range, balancing growth in underwriting risks and internal capital generation. Furthermore, concentration to investment property is expected to further dilute, reducing liquidity risk.
An upgrade of the national scale rating is likely to follow a sustained strengthening in capitalisation and liquidity metrics, coupled with an improvement in asset quality. A significant rebalancing of assets and premiums towards lower risk jurisdictions could also be positive to both national and international scale ratings. Negative rating action could result from a sustained lowering in capitalisation and liquidity metrics. Furthermore, should the reinsurer’s capital base measure below minimum regulatory requirements beyond current regulatory forbearance (due to market distortions), the ratings could come under negative pressure.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|Jurisdictional Supplement for Criteria, July 2020|
|GCR Country Risk Scores, March 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Tropical Reinsurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial strength||Initial/ Last||International||CCC||Stable Outlook||September 2020|
|Initial/ Last||National||BBB+(ZW)||Evolving Outlook||September 2020|
Risk score summary
|Rating components and factors||Risk score|
|Country risk score||0.25|
|Sector risk score||2.75|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Primary Market||The part of the capital markets that deals with the issuance of new securities.|
|Private||An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.|
|Property||Movable or immovable asset.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Reserves||A portion of funds allocated for an eventuality.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Revaluation||Formal upward or downward adjustment to assets such as property or plant and equipment.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Secondary Market||The secondary market is where securities are bought and sold once they have been issued in the primary markets.|
|Security||One of various instruments used in the capital market to raise funds.|
|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.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Technical Margin||Measures the percentage of net earned premiums remaining after accounting for claims and expenses incurred.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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.|
|Upgrade||The rating has been raised on its specific scale.|
Salient Points 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 ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the entity and other reliable third parties to accord the credit ratings included:
- Audited financial statements as at 31 December 2020;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2021;
- Unaudited interim results to 31 March 2021
- Retrocession cover notes for 2021;
- Other relevant documents.