Johannesburg, 04 May 2018– 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 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ZB Reinsurance Limited (“ZB Re”) based on the following key criteria:
ZB Re’s capital base amounted to USD10.2m at FY17 (FY16: USD10.0m), supporting healthy risk adjusted capitalisation. Nonetheless, in absolute terms, the scale of the capital base is viewed to be moderate relative to regional competitors (taking the reinsurer’s expansionary targets into account). Over the medium term, risk adjusted capitalisation may moderate, on the back of higher asset exposure, together with anticipated increases in underwriting risks. In GCR’s view, the explicit guarantee from ZB Financial Holdings Limited (“ZBFH”) affords the reinsurer a degree of financial flexibility. The 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. Maximum net deductibles per risk and event are limited to a conservative level relative to capital, whilst the retrocession panel reflects a sound level of aggregated credit strength.
The business profile is viewed to be moderately strong, supported by a healthy competitive position in the domestic market and a moderately diversified earnings profile. The reinsurer’s domestic position is supported by strong brand recognition, entrenched relationships with key cedants, as well as group synergies that provide technical expertise and risk management. The reinsurer expects to enhance earnings diversification, both by line of business and geographically over the medium term.
The reinsurer’s earnings capacity moderated to an intermediate level, underpinned by lower net profitability over the last two years. This was largely due to both reduced underwriting profitability and lower investment returns. In this respect, the operating margin averaged 7% over the last two years, compared to 13% over the prior two year cycle. In GCR’s view, underwriting performance is likely to remain within an intermediate range over the outlook horizon.
The liquidity profile moderated to a strong level, from very strong levels recorded previously. This was on the back of management’s portfolio rebalancing, with increased weighting in non-cash holdings for value preservation. Accordingly, cash coverage of net technical liabilities equated to a lower 1.6x at FY17 (FY16: 2.8x), while average monthly claims coverage registered at 9 months (FY16: 15 months). Single counterparty concentration is viewed to be high, with 83% of liquid assets held with one institution. Nonetheless, this is partially mitigated by the fact that the financial institution is viewed to be of strong credit quality. The liquidity profile is likely to remain with a similar range, underpinned by the asset allocation envisaged.
GCR views country risk factors to be elevated, and a systematic rating consideration applicable to reinsurers. Operational challenges are likely to persist over the rating horizon, albeit with positive changes in the socio-political outlook and macroeconomic fundamentals possible over the medium term, should the political situation stabilise.
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 (May 2017)||Last rating (May 2017)|
|Claims paying ability: A-(ZW)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Yvonne Mujuru||Godfrey Chingono|
|Sector Head: Insurance Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated April 2018
ZB Reinsurance Limited rating reports, 2009-2017.
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 2017
- Four years of comparative audited numbers
- Unaudited year to date results to 31 March 2018
- Budgeted financial statements to December 2018
- 2018 retrocession 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 terms, please click here
GCR affirms ZB Reinsurance Limited’s rating of A-(ZW); Outlook Stable.