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’.
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.
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.
|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|
Risk Score Summary
|Risk scores||Emeritus Reinsurance Zambia Limited|
|Country risk score||2.25|
|Sector risk score||2.75|
|Management and governance||0.00|
|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.