Johannesburg, 20 July 2018– 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 2019.
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 rating reflects strong earnings capacity, which is likely to be sustained over the medium term. Underwriting profitability is supported by a well contained total benefits paid to total income ratio (review period average: 40%), translating into a corresponding healthy operating margin of 22% (FY17: 18%). Furthermore, a consistent stream of investment and fee income provides some cushion to bottom-line earnings, with embedded value earnings, at current assumptions, assessed at a higher USD8m (FY16: USD6m) by independent actuaries. Note is, however, taken of the potential for earnings variability to arise from asset and liability mismatch risk.
Risk adjusted capitalisation registered at an intermediate level, with shareholder funds coverage of policyholder liabilities equating 34% at FY17 (FY16: 45%). This was largely a function of elevated market risk, partially offsetting sound capital generation from operations, as well as relatively contained credit and insurance risks. As such, entrenched exposure to high risk illiquid investments is a material rating weakness.
Liquidity remained moderately strong, albeit pressured by the rebalancing of the investment portfolio into listed equities and entrenched exposure to illiquid assets. Accordingly, cash cover of monthly claims remained lower at 10 months (FY16: 8 months), compared to 22 months at FY15, while coverage of policyholder liabilities remained relatively stable at 0.4x. Although the insurer’s investment portfolio exhibited high coverage of policyholder liabilities at 1.3x (FY16: 1.4x), elevated exposure to highly illiquid assets is viewed to present asset-liability management challenges beyond those already posed by the environment. GCR took cognisance of management concerns underpinning the recent rebalancing of the investment portfolio in the context of prevailing currency risks, nonetheless, liquidity risk is viewed to be elevated in the absence of a formalised asset-liability management framework.
Zimnat Life continues to reflect a moderately strong competitive position, with the strategic revenue drive in individual life offsetting revenue risk in softening group life markets. Accordingly, market share registered an uptick to 5.6% in FY17 (FY16: 5.3%). Going forward, revenue traction is expected to be bolstered by rebranding to reflect the association with Sanlam Emerging Markets (“SEM”). This is likely to improve business retention in the highly contested group life business, while broadening prospects for new business in both the domestic and diaspora markets. 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 28% in FY17 (FY16: 27%; FY15: 22%). Going forward, the revenue mix is expected to reflect increased exposure to moderate risk products, given growth retraction in annuity products. In this respect, earnings diversification could be maintained at a moderately strong level over the rating horizon.
Country risk factors are viewed to be elevated, and a systematic rating consideration applicable to insurers. 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.
Zimnat Life’s national scale rating currently matches GCR’s rating ceiling applicable for the Zimbabwean market. In this regard, positive rating action may follow an assessment of country and industry risk factors. Conversely, a further deterioration in liquidity metrics or continued mismatch between assets and liabilities could result in negative rating movement.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2011)|
|Financial strength: BBB+(ZW)|
|Last rating (July 2017)|
|Financial strength: A-(ZW)|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance Companies, updated May 2018
Zimnat Life Assurance Company Limited rating reports, 2011-2017
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. 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 2017
- Four years of comparative audited numbers
- Budgeted financial statements for 2018
- Actuarial valuation report for December 2017
- 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.