Announcements Insurance Rating Alerts

GCR downgrades Emeritus Re Zambia’s national scale rating to B(ZM); Negative Outlook and international scale rating to CCC-; Stable Outlook

Rating Action

Johannesburg, 23 December 2019 – GCR Ratings (“GCR”) has downgraded Emeritus Reinsurance Zambia Limited’s (“Emeritus Re Zambia”) national scale financial strength (formerly claims paying ability) rating to B(ZM) from BBB(ZM). The rating has been taken off Negative Watch, with a Negative Outlook accorded. Furthermore, GCR has downgraded Emeritus Re Zambia’s international scale financial strength (formerly claims paying ability) rating to CCC- from B-, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Emeritus Reinsurance Zambia Limited Financial strength National B(ZM) Negative Outlook
Financial strength International CCC- Stable Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the ratings for Emeritus Re Zambia were placed ‘Under Criteria Observation’. GCR finalised the review for Emeritus Re Zambia under the released Criteria for Rating Insurance Companies, May 2019. As a result, the ratings for Emeritus Re Zambia have been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The ratings downgrade follows continued pressure in the Zambian operating environment that has resulted in a weakening in Emeritus Re Zambia’s financial profile, with support from a planned capital injection not having materialised as expected. The Negative Outlook on the national scale rating reflects potential for a further deterioration in earnings to adversely impact the reinsurer’s financial profile.

Emeritus Re Zambia’s earnings have been highly volatile and evidenced a weakening trend, following the large underwriting losses registered in FY18 and 1H F19. As a result, return on net earned premiums has averaged -17% in recent periods, compared to an approximate break even position between FY14 and FY17. GCR expects earnings to remain suppressed over the outlook horizon, given an elevated expense base and challenges in achieving scale efficiencies.

The weakening in earnings has resulted in a reduction in GCR’s risk adjusted capital adequacy requirement coverage ratio at FY18 and 1H F19 (from the strong level posted at FY17), with support from the planned recapitalisation not having materialised. The capitalisation assessment also considered the small capital base in absolute terms, at less than USD2m. Furthermore, the reinsurer continued to reflect weak liquidity, with stressed financial asset coverage of net technical liabilities remaining below 1x at 1H F19. In this regard, Emeritus Re Zambia’s rating is sensitive to a further weakening in the business profile in the absence of a sustained turnaround in operating performance.

The rating considers Emeritus Re Zambia’s limited business profile. The reinsurer holds an approximate 3% share of domestic premium cessions, and is viewed to lack competitiveness in markets outside Zambia. Furthermore, the assessment of the overall business profile reflects very low premium scale per line of business and limited geographic diversification, with the majority of business derived from Zambia.

Outlook Statement

The Negative Outlook reflects potential for negative rating action if the business profile weakens on the back of continued earnings pressure or a deterioration in cash flow generation.

Rating Triggers

The ratings may be downgraded if there is a reduction in capitalisation and/or liquidity, or if earnings continue to register at weak levels. The Outlook may revert to Stable over the medium term if there is a sustained turnaround in earnings that leads to a strengthening in credit protection metrics.

Analytical Contacts

Primary analyst Susan Hawthorne Senior Analyst
Johannesburg, ZA Susanh@GCRratings.com +27 11 784 1771
Committee chair Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA Ymujuru@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, June 2019
GCR Insurance Sector Risk Scores, December 2019

Ratings History

Rating class Rating scale Review Rating Outlook/Watch Date
Claims paying ability National Initial BBB+(ZM) Stable November 2009
Last BBB(ZM) Rating Watch April 2019
Claims paying ability International Initial B Stable November 2009
Last B- Rating Watch April 2019

Risk Score Summary

Risk scores Emeritus Reinsurance Zambia Limited
Operating environment 5.00
Country risk score 2.25
Sector risk score 2.75
Business profile (2.00)
Competitive position (1.50)
Premium diversification (0.50)
Management and governance 0.00
Financial profile (1.75)
Earnings (0.50)
Capitalisation (0.50)
Liquidity (0.75)
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 1.25

Glossary

Capital The sum of money that is invested to generate proceeds.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
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.
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.
Rating Horizon The rating outlook period
Rating Outlook A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
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.

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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Emeritus Reinsurance Zambia Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Emeritus Reinsurance Zambia Limited participated in the rating process via face-to-face 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 Emeritus Reinsurance Zambia Limited and other reliable third parties to accord the credit ratings included:

  • The audited financial results up to 31 December 2018
  • Four years of comparative audited numbers to 31 December
  • Unaudited management accounts to 30 June 2019
  • Budgeted financial statements to 31 December 2019
  • Other related documents.
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