Johannesburg, 15 Dec 2014 — 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 Negative. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Zambian Reinsurance Company Limited at B; with the outlook accorded as Stable. The ratings are valid until 11/2015.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Zambian Reinsurance Company Limited (“Zambian Re”) based on the following key criteria:
The Negative Outlook reflects Zambian Re’s limited capital base, given the protracted nature of the planned capital injection. Liquidity metrics have also remained constrained, with cash covering net technical liabilities by 0.8x (F12: 0.7x), and no additional financial assets available to offer further support. GCR expects the risk-adjusted capitalisation and net provision coverage metrics to remain at constrained levels, barring capital injections.
The reinsurer exhibits a high level of capital risk, given the quantum of premium debtors. Premium debtors in excess of 180 days represented a high 31% of FYE13 capital (FYE12: 45%), while net related counterparty exposures equated to 7% of FYE13 capital. As such, the international solvency margin equated to 36% at FYE13 (FYE12: 27%) when aged premium debtors in excess of 180 days are netted off. On a nominal basis, the international solvency margin registers at an improved 52% at FYE13 (FYE12: 49%).
Zambian Re is one of two locally domiciled reinsurers in Zambia. However, the reinsurer’s balance sheet size and premium levels in absolute terms are viewed to be comparatively limited in the context of the regional insurance market.
The reinsurer has recorded an average positive underwriting margin of 5%, albeit exhibiting volatile margins as a result of fluctuations in the claims experience and a high cost base over the review period. GCR expects the trend to continue over the medium term in the absence of significant improvements in cost and claims management.
The reinsurer receives non-proportional risk and catastrophe cover administered by the parent, Emeritus International Reinsurance (“Emeritus”). The programmes are placed with well rated international reinsurers, led by Trust International Insurance and Reinsurance Company (Bahrain). The comparably lower ratings of participants on the auto facultative arrangements, however, increase counterparty risk.
The international rating is capped by the Zambian sovereign rating of B, as assets are locally domiciled, and the majority of revenue is locally derived.
The ratings could be downgraded in the absence of a strengthening in risk adjusted capitalisation and liquidity metrics. Furthermore, sustained underwriting deficits and a weak performing debtors book could place additional downward pressure on the ratings. Conversely, recapitalisation (in line with anticipated regulatory changes), translating to increasing solvency and liquidity metrics, sustainable growth and consistent underwriting profitability would place upward pressure on the ratings over the medium term. A demonstrated improvement in the company’s risk framework and corporate governance would also be favourably viewed.
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|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (Nov/2009)||Initial rating (Nov/2009)|
|Claims paying ability: BBB+(ZM)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|Last rating (Nov/2013)||Last rating (Nov/2013)|
|Claims paying ability: BBB(ZM)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
Sector Head: Insurance
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, Updated July 2014
Zambian Reinsurance Company Limited rating reports, 2009-2013
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES 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 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 ratings have 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 ratings included the audited annual financial statements for 2013 (plus four years of comparative numbers), full year detailed budget for 2014, most recent year to date management accounts to August 2014, 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.
GCR affirms Zambian Reinsurance Company Ltd’s rating of BBB(ZM); Outlook Negative.