Johannesburg, 22 May 2017– Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to ZB Reinsurance Limited of A-(ZW), with the Outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating of B assigned to ZB Reinsurance Limited, with the Outlook accorded as Stable. The ratings are valid until May 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to ZB Reinsurance Limited (“ZB Re”) based on the following key criteria:
ZB Re reflects strong capitalisation, with shareholders’ funds amounting to USD10m at FY16 (FY15: USD9m). Capital growth has largely been supported by consistent levels of retained profit over the review period. As such, risk adjusted capitalisation remained robust, further supported by well-contained underwriting risks and limited market risk exposures. Accordingly, the international solvency margin equated to a high 72% (BGT17: 81%). Going forward, risk adjusted capitalisation is expected to remain at strong levels, on the back of sustained capital generation, limitation of asset risk exposure, and an explicit solvency target range. The reinsurer is viewed to have financial flexibility, given the explicit parental support from ZB Financial Holdings Limited (“ZBFH”). An explicit parental guarantee states that ZBFH (unrated) undertakes to settle all claims legally payable by the reinsurer to the extent that it is unable to meet admitted obligations.
The reinsurer holds a very strong competitive position in the domestic market. In this regard, ZB Re is the largest player in the market, with a market share of 19% in FY16. This position is underpinned by entrenched relationships with key cedants, as well as group synergies that provide technical expertise and risk management. The reinsurer expects to increase geographic diversification over the medium term, albeit cognisance is taken of increased competitive dynamics with regional peers possessing increased balance sheet strength.
Earnings capacity is viewed to be moderately strong. In this respect, the aggregate operating margin has averaged 11% over the review period. This has been underpinned by a relatively stable claims trend and competitive expense ratio (derived from scale efficiencies). GCR expects earnings capacity to persist at current levels, supported by continued cost containment.
Liquidity metrics have registered at very strong levels, with cash covering average claims by 15 months, and net technical provisions by 2.8x at FY16. ZB Re’s cash generative capacity has remained healthy throughout the review period, while stability in average claims experience and net technical provisions has facilitated an overall strengthening in liquidity metrics. Key liquidity measures are expected to be sustained within a very strong range in FY17.
ZB Re maintains a conservative asset allocation, with 69% of total investments invested in cash and liquid instruments. Single counterparty concentration is viewed to be high, with 94% of liquid assets held with one institution. Nonetheless, this is partially mitigated by the strong credit quality of the financial institution.
GCR views country risk factors to be elevated, and a systemic rating consideration applicable to insurers. Operational challenges are likely to persist over the rating horizon, given the uncertain socio-political outlook, severe liquidity constraints, reduction in banking sector stability and weak macroeconomic fundamentals.
The rating currently matches the national scale ceiling applicable to entities operating within the Zimbabwean insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Negative rating sensitivities pertain primarily to reductions in capitalisation, earnings capacity and competitive positioning.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating post dollarisation (May 2009)||Initial rating post dollarisation (May 2011)|
|Claims paying ability: BBB+(ZW)||Claims paying ability: B|
|Outlook: Evolving||Rating Watch: Yes|
|Last rating (June 2016)||Last rating (June 2016)|
|Claims paying ability: A-(ZW)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Munyaradzi Mushure||Marc Chadwick|
|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 2016
ZB Reinsurance Limited 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/RATING-SCALES-DEFINITIONS. 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 were 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.
ZB Reinsurance Limited participated in the rating process via teleconference management meetings and/or 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 ZB Reinsurance Limited with no contestation of the ratings.
The information received from ZB Reinsurance Limited and other reliable third parties to accord the credit ratings included:
- The audited annual financial statements to December 2016
- Four years of comparative audited numbers
- Unaudited year to date results to 30 April 2016
- Budgeted financial statements to December 2017
- 2017 reinsurance cover notes
- 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.
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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.|
|International Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a more detailed glossary of term, please click here
GCR affirms ZB Reinsurance Limited’s rating of A-(ZW); Outlook Stable.