Johannesburg, 14 July 2017– Global Credit Ratings has today affirmed the national scale financial strength rating assigned to Zimnat Life Assurance Company Limited of A-(ZW), with the outlook accorded as Stable. The rating is valid until June 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Zimnat Life Assurance Company Limited (“Zimnat Life”) based on the following key criteria:
Zimnat Life’s earnings measured at a strong level, albeit with earnings risk expected to increase going forward. Strong earnings were underpinned by a well contained total benefits paid to total income ratio (review period average: 43%), translating to a sound operating margin of 21% over the review period (FY16: 23%). This notwithstanding, current year operating profitability benefited from a sizeable unrealised gains on equities, which offset a rising trend in benefits paid relative to recurring income. Excluding such gains, operating margins could have weakened materially to 7% in FY16. In this respect, operating margins have potential to remain suppressed (BGT17: 8%), reflecting a possible upward migration in the benefits paid to total income ratio (BGT17: 56%; FY16: 41%). As such, earnings capacity is expected to be a key rating consideration over the rating horizon.
Risk adjusted capitalisation was maintained at an intermediate level, with shareholder funds coverage of policyholder liabilities strengthening marginally to 45% at FY16 (FY15: 43%). This was a function of sound capital generation from operations, albeit with elevated market risk representing an offsetting factor. Risk adjusted capitalisation could be pressurised in FY17, reflecting an anticipated moderation in earnings generation and increased exposure to high risk investments, albeit remaining intermediate.
Liquidity metrics measured at a moderately strong level, with cash coverage of policyholder liabilities registering at 0.5x at FY16 (FY15: 0.4x). This reflects strong cash inflows on the deposit administration business, albeit offset by the insurer’s increasing exposure to high risk assets. In this respect, liquidity is expected to be maintained at a moderately strong level going forward, although could be sensitive to a further rebalancing of the investment portfolio into financial assets. In this respect, GCR views overall asset liability matching to be limited by a very high and growing exposure to high risk assets.
Zimnat Life continues to reflect a moderately strong competitive position, with the strategic revenue drive in individual life offsetting the adverse impact of softening group life markets. Accordingly, market share was maintained at a sound level of 5.3% in FY16 (FY15: 5.5%). Going forward, revenue traction is expected to be bolstered by the rebranding to reflect the association with Sanlam Emerging Markets. This is likely to improve business retention in the highly contested group life business, while broadening prospects for new business on both the domestic and diaspora market. Accordingly, there are prospects for the insurer’s competitive position to strengthen over the medium term.
The insurer displays a moderately strong level of earnings diversification, underpinned by an almost balanced participation on both insurance and investment contracts. This has been supported by revenue traction in individual life, with the line’s share of total revenue having increased to 27% in FY16 (FY15: 22%). Going forward, the revenue mix is expected to reflect increased exposure to retail risks, partially moderating a possible increase in exposure to high risk annuity products. In this respect, earnings diversification is expected to be maintained at a moderately strong level over the rating horizon.
Material reinsurance counterparties evidence an intermediate aggregate level of counterparty strength. In addition, the maximum net deductible is viewed to be conservative at less than 1% of FY16 capital.
GCR views country risk factors to be elevated, and a systemic rating consideration applicable to insurers. Operational challenges are likely to persist given the uncertain socio-political outlook, severe liquidity strain, reduction in banking sector stability and weak macroeconomic fundamentals.
Zimnat Life’s national scale rating currently matches GCR’s rating ceiling applicable for the Zimbabwean market. Conversely, negative ratings pressure could develop on the back of an aggressive investment strategy thereby affecting liquidity strength, and from a persistent deterioration in the operating result, coupled with capitalisation contracting on a sustained basis. Should the economic or socio-political outlook deteriorate further, the rating ceiling of the insurance sector may be reviewed.
| NATIONAL SCALE RATINGS HISTORY |
| Initial rating (November 2011) |
| Financial strength: BBB+(ZW) |
| Outlook: Stable |
| Last rating (June 2016) |
| Financial strength: A-(ZW) |
| Outlook: Stable |
ANALYTICAL CONTACTS
|
Primary Analyst |
| Godfrey Chingono |
| Credit Analyst |
| (011) 784-1771 |
| godfreyc@globalratings.net |
| Committee Chairperson |
| Marc Chadwick |
| Sector Head: Insurance Ratings |
| (011) 784-1771 |
| chadwick@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance Companies, updated July 2016
Zimnat Life Assurance Company Limited rating reports, 2011-2016
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. 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 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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Zimnat Life Assurance Company Limited participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Zimnat Life Assurance Company Limited with no contestation of the rating.
The information received from Zimnat Life Assurance Company Limited and other reliable third parties to accord the credit rating includes:
- Audited financial results to 31 December 2016
- Four years of comparative audited numbers
- Budgeted financial statements for 2017
- Actuarial valuation report for 31 December 2016
- The current year reinsurance cover notes
- Other non-public statistical information
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
| Accounting | A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results. |
| Assets | A resource with economic value that a company owns or controls with the expectation that it will provide future benefit. |
| Benefits | Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract. |
| 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 Base | The issued capital of a company, plus reserves and retained profits. |
| 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. |
| Country Risk | The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country. |
| Coverage | The scope of the protection provided under a contract of insurance. |
| Deductible | The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer. |
| Diversification | Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in. |
| Dividend | The portion of a company’s after-tax earnings that is distributed to shareholders. |
| Earned Premium | That part of the premium applicable to the expired part of the policy period, including the short-rate premium on cancellation, the entire premium on the amount of loss paid under some contracts, and the entire premium on the contract on the expiration of the policy. When a premium is paid in advance for a certain time, the company is said to “earn” the premium as the time advances. |
| International Scale Rating LC | 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. |
| Liabilities | All financial claims, debts or potential losses incurred by an individual or an organisation. |
| 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. |
| Net Profit | Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees. |
| Operating Margin | Measures the efficiency of profit generation from investments and underwriting. |
| Policy | The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance. |
| 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 |
| 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. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Shareholder | An individual, entity or financial institution that holds shares or stock in an organisation or company. |
| Short Term | Current; ordinarily less than one year. |
| Upgrade | The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade. |
| Working Capital | Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances. |
For a detailed glossary of terms please click here
GCR affirms Zimnat Life Assurance Company Limited’s rating of A-(ZW); Outlook Stable.
