|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|CBZ Life Limited||Financial strength||National||A-(ZW)||Negative Outlook|
The downgrade reflects a decline in CBZ Life’s credit profile following protracted contraction in premiums. While the rating anchors on a strong financial profile, the Negative Outlook reflects potential for sustained premium pressures to further moderate earnings and risk adjusted capitalisation. This notwithstanding, the rating derives implied support from integration and synergies with CBZ Holdings Limited (“the group”).
CBZ Life has registered a protracted contraction in premiums over the past three years with the market share registering at 1.5% in FY20 (FY19: 2.3%; FY18: 2.9%) and the premium base amounting to c. USD1.7m (FY19: USD2.4m; FY18: USD10m). The contraction in GWP emanated from erosion of value on the USD sums assured following the introduction of the local currency in 2019 which was accompanied by hyperinflation. Furthermore, the business mix reflects limited diversification, with concentration to the funeral product, coupled with a lack of geographical diversification. The ability of the insurer to demonstrate sustained recovery to its market position will be a key rating consideration going forward.
Earnings remained suppressed in FY20 due to premium contractions resulting in loss of scale efficiencies reflected by a spike in the operating expense ratio. This was coupled with a once-off provision for revaluations that strained earnings further. In this respect, the operating expense ratio registered at 183% in FY20 (FY19: 99%), partially offset by a favourable loss ratio of 17% (FY19: 28%). Accordingly, CBZ Life’s operating margin equated to -45% (FY19: -274%) and is projected to continue to measure within a negative range in FY21 should the cost structure remain elevated. Net profitability was supported by investment income which increased by 120% to ZWL107m in FY20 driven by fair value gains in equities and investment property. However, the insurer closed the year with a net after tax loss of ZWL106m (FY19: -ZWLK169m) and we expect earnings to remain under pressure over the outlook horizon.
The insurer’s capital base contracted by 24% to USD4.4m at FY20 on the back of capital erosion due to sustained earnings strain. In this regard, the GCR capital adequacy ratio (“CAR”) moderated to 1.8x (FY19: 3.1x). Going forward, risk adjusted capitalisation is expected to remain suppressed should the earnings strain persist, although management’s strategy to invest in value preserving assets is expected to cushion to the balance sheet in a hyperinflationary environment.
CBZ Life’s liquidity profile was within a strong (albeit reduced) range, supported by management’s strategy to invest in assets that track inflation, given the hyperinflationary operating environment. Accordingly, cash and stressed financial assets covered net technical liabilities by 2.3x (FY19: 7.5x), while coverage of operational cost requirements equated to 0.6 months (FY19: 2 months). Liquidity metrics are expected to remain within a lower range over the rating horizon, with the liquidity ratio likely to moderate below the 2.0x mark should the current earnings strain persist.
The Negative Outlook captures the expectation that earnings pressure is likely to persist, resulting in downside risk to risk adjusted capitalisation and liquidity. The business profile is expected to remain limited over the outlook horizon.
Reversion to a Stable Outlook may follow a sustainable turnaround in earnings while liquidity and risk adjusted capitalisation remain within a strong range. Furthermore, the ability of the insurer to recover and maintain its market position could be positively viewed. Conversely, sustained contraction in premiums resulting in weaker earnings will likely trigger negative rating action, especially if this results in a reduction in risk adjusted capitalisation and/or a weakening in liquidity below expected levels.
|Primary analyst||Linda Matavire||Analyst: Insurance Ratings|
|Johannesburg, ZA||LindaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@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|
|Jurisdictional Supplement for Criteria, July 2020|
|GCR Country Risk Scores, July 2021|
|GCR Insurance Sector Risk Scores, April 2021|
|Rated entity||Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|CBZ Life Limited||Claims paying ability||Initial||National||BBB+(ZW)||Positive Outlook||March 2016|
|Financial strength||Last||National||A(ZW)||Negative Outlook||September 2020|
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||0.00|
|Sector risk score||2.75|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Primary Market||The part of the capital markets that deals with the issuance of new securities.|
|Private||An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.|
|Property||Movable or immovable asset.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Reserves||A portion of funds allocated for an eventuality.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Revaluation||Formal upward or downward adjustment to assets such as property or plant and equipment.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Secondary Market||The secondary market is where securities are bought and sold once they have been issued in the primary markets.|
|Security||One of various instruments used in the capital market to raise funds.|
|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.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Technical Margin||Measures the percentage of net earned premiums remaining after accounting for claims and expenses incurred.|
|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 Ratings
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 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.
The credit rating has been disclosed to the rated party. 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 and other reliable third parties to accord the credit rating included:
- Audited financial statements as at 31 December 2020;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2021;
- Unaudited interim results to 31 May 2021
- Reinsurance cover notes for 2021;
- Other relevant documents.