Johannesburg, 12 July 2021 – GCR Ratings (“GCR”) has assigned Zambia Reinsurance Plc (“Zambia Re”) a national scale financial strength rating of A-(ZM), with the Outlook accorded as Stable.
|Rated entity / issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Zambia Reinsurance Plc||Financial strength||National||A-(ZM)||Stable Outlook|
Zambia Re’s rating reflects the reinsurer’s strong capitalisation and liquidity partly offset by its very small scale and weak earnings track record.
Zambia Re has a low market share of between 2% and 3% of domestic primary market cessions, and is a very small player in other markets of operation. As a result, premium scale is low at around USD3m and is expected to remain similarly constrained relative to regional peers. The premium diversification assessment also considered the low premium volumes across lines of business, although partly offset by a level of geographic diversification. Going forward, the expected introduction of mandatory cessions could enhance Zambia Re’s competitiveness in the domestic market, although we expect the reinsurer to remain comparatively small in a regional context.
Zambia Re reported fairly large underwriting losses over the past three years, with its competitive net loss ratio offset by a high operating expense base, which has been exacerbated by doubtful debt provisions. The five-year average underwriting margin equated to -12% in FY20 and the corresponding net margin registered at 9%, although the latter has been volatile and reliant on foreign exchange movements. Excluding unrealised movements, the net margin equated to -15% in FY20 (FY19: -5%; FY18: -17%) and is expected to continue to mirror underwriting profitability trends. The introduction of minimum premium payment periods through provisions in the Insurance Act 2021 and Zambia Re’s enhanced internal collection capabilities are expected to assist in alleviating underwriting pressures experienced in recent years. These initiatives could be a material driver of earnings over the short to medium term, if well implemented.
Following a rights issue in 2H F20, Zambia Re’s total capital increased to ZMW89m at FY20 (FY19: ZMW47m). This underpinned a strengthening in the GCR Capital Adequacy Ratio (“CAR”) to above 4x, from just under 3x at FY19. The capitalisation assessment nevertheless considers the limited capital scale of around USD4m. Similarly, liquidity strengthened in FY20, with coverage of net technical liabilities registering above 5x and operational cash coverage equating to 15 months, supported by conservative investment of the new capital. We expect capitalisation and liquidity to remain within strong ranges over the outlook horizon, although the potentially elevated premium growth trajectory and our projections of a level of ongoing earnings pressure could see a moderation over the medium term.
The Stable Outlook reflects the reinsurer’s strong capitalisation and liquidity, which are viewed to be sufficient to absorb a high growth trajectory and earnings pressure over the outlook horizon. We expect the business profile to remain limited relative to regional peers, given the small size of the Zambian market, although the expected introduction of mandatory cessions could enhance Zambia Re’s competitiveness in the domestic market.
The rating could be upgraded if earnings strengthen on a sustainable basis and these support capitalisation and liquidity at strong levels. The rating could be downgraded if persistent earnings weakness or aggressive growth result in dilution of capitalisation or liquidity below expectations.
|Primary analyst||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, July 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Zambia Reinsurance Plc
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial strength||Initial/last||National||A-(ZM)||Stable Outlook||July 2021|
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||1.50|
|Sector risk score||2.75|
|Management and governance||0.00|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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.|
|Upgrade||The rating has been raised on its specific scale.|
Salient Points of Accorded Rating
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the entity to accord the credit rating included:
- The audited financial results to 31 December 2020
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial accounts to 31 December 2021
- Unaudited management accounts to 31 March 2021
- Other relevant documents