Johannesburg, 26 Nov 2013 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Zambian Reinsurance Company Limited of BBB(ZM); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to Zambian Reinsurance Company Limited of B; with the outlook accorded as Stable. The rating(s) are valid until 11/2014.
Global Credit Ratings has accorded the above credit rating(s) on Zambian Reinsurance Company Limited based on the following key criteria:
Zambian Reinsurance Company Limited (Zambian Re) is a wholly-owned subsidiary of Emeritus International Reinsurance Company, which in turn houses Baobab Re’s regional operations. The reinsurer is currently in talks with a potential investor, which if successful, could see the shareholding structure change materially in the short term. GCR nonetheless notes with concern the current shareholder’s inability to recapitalise its subsidiaries over the review period.
Solvency has recovered from previous lows, registering at 49% at FYE12 and an annualised 52% as at August 2013 (“YTD F13”). In the absence of additional capital, solvency metrics will remain largely unchanged in the short term. In this regard, the large premium debtors balances (representing 118% of equity as at FYE12, including net reinsurance receivables) are a source of concern. Coupled with the high per risk retentions, this heightens capital risk. Positively, Zambian Re has reduced its net exposure to related counterparties to negligible levels, a position that is expected to be sustained going forward.
Top line growth has slowed in recent years, due to funding constraints and the adoption of stricter underwriting guidelines. Recapitalisation will therefore be necessary to ensure sound scale enhancement over the medium term. The volatile claims experience has driven an erratic underwriting trend over the review period. Further market penetration, coupled with refinements to the risk management framework, will need to be sustained to ensure consistent profitability of the reinsurer’s book.
Liquidity metrics have fluctuated significantly over the period under review, on the back of erratic operating cash flows. Although metrics are currently well above historic lows, GCR considers the current pool of liquid assets (corresponding to 60% of equity and 71% of net technical liabilities) insufficient to support the reinsurer’s business plan.
The international rating is capped by the Zambian sovereign rating of B+, as most of its assets are locally domiciled. The majority of participants on the retrocession XoL programme are secure rated. However, the low ratings of participants on the auto fac and Q/S arrangements increases counterparty risk.
Upward rating movement would be dependent on timely recapitalisation (in line with regulatory changes), translating to stronger solvency and liquidity metrics. Furthermore, a demonstrated ability to generate sustainable growth and consistent underwriting profitability would bode positively for the rating. A consistent improvement in the company’s risk framework would also be favourably viewed. Failure to recapitalise in the short term, or a rapid ramp up of the risk threshold, however, could materially curtail solvency and liquidity metrics, warranting negative rating action. In addition, a persistently weak performing debtors book would place downward pressure on the rating.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (Nov/2009)||Initial rating (Nov/2009)|
|Claims paying ability: BBB+(ZM)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|Last rating (Oct/2012)||Last rating (Oct/2012)|
|Claims paying ability: BBB(ZM)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|+27 11 784 1771|
|Regional Sector Head: Insurance|
|+27 11 784 1771|
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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.
Zambian Reinsurance Company Limited 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 rating/s has been disclosed to Zambian Reinsurance Company Limited with no contestation of the rating.
The information received from Zambian Reinsurance Company Limited and other reliable third parties to accord the credit rating included the 2012 audited annual financial statements (plus four years of comparative numbers), detailed budgeted financial statements for 2013, year to date management accounts to August 2013, the 2013 retrocession cover notes, risk framework, reserving methodologies and capital management policy.
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.