Announcements Insurance Rating Alerts

GCR downgrades FBC Re’s national scale financial strength rating to A-(ZW) on weakened financial profile due to hyperinflationary environment; Outlook Evolving

Rating action

Johannesburg, 7th September 2021 – GCR Ratings (“GCR”) has downgraded FBC Reinsurance Company Limited’s (“FBC Re”) national scale financial strength rating to A-(ZW), from A(ZW), with an Evolving Outlook. At the same time, GCR affirmed FBC Re’s international scale financial strength of CCC, Outlook Stable.

Rated entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

FBC Reinsurance Company Limited

Financial strength

International

CCC

Stable Outlook

National

A-(ZW)

Evolving Outlook

Rating rationale

FBC Re’s rating downgrade reflects a deterioration in the reinsurer’s risk adjusted capitalisation on an inflation adjusted basis on the back of persistent earnings strain attributable to the hyperinflationary environment. The Evolving Outlook reflects the uncertainties presented by the operating environment which could result in further weakening or recovery in the entity’s credit profile over the rating horizon. The business profile remains comparatively limited due to concentration to the domestic market.

The reinsurer’s risk adjusted capitalisation moderated on an inflation adjusted basis compared to historical levels. In this respect, the GCR capital adequacy ratio (“CAR”) registered at 1.1x at FY20 (FY19: 1.7x), compared to levels above 2x observed between FY16 and FY18. The reduction was largely driven by elevated net monetary losses in FY19, occasioned by the hyperinflationary environment and a slower than anticipated recovery in FY20. While the reinsurer’s balance sheet was more insulated from inflation relative to FY19, through investing in value preserving domestic assets and locating some assets in offshore markets, the capital base did not fully recover, measuring at USD5.8m at FY20 (FY19: USD5.7m; FY18: USD15.8m). Going forward, we see potential for the GCR CAR to improve to above 1.5x on expectations of sustained positive trend in capital generation and the associated disinflationary environment as reflected by an increase in the capital base and GCR CAR to USD8.4m and 1.3x at 1H F21. That said, risk adjusted capitalisation remains susceptible to further earnings strain.

Liquidity metrics weakened to an intermediate range from historically strong levels, evidencing sensitivity to asset allocation strategies aimed at value preservation. In this respect, cash and stressed financial assets coverage of net technical liabilities registered at 1.9x compared to above 2.5x registered historically, while operational cash coverage equated to 6 months, with cognisance taken of the potential increase in foreign currency balances given the switch to USD denominated policies.

FBC Re’s earnings have been volatile over the past three years, reflected by bottom-line losses in FY18 and FY19 which were largely driven by net monetary losses. However, review year earnings saw a weakening in underwriting performance, with losses registered balanced off by sound investment incomes. In this respect, the underwriting margin deteriorated to -17% (FY19: 15%; FY18: 2%), largely underpinned by a spike in claims experience and operating expenses. As such, the net incurred loss ratio registered at 46% (FY19: 34%; FY18: %), while the operating expense ratio peaked at 48% (FY19: 29%). The underwriting loss offset by foreign exchange and fair value gains on equities, with investment income totalling ZWL308m (FY19: ZWL221 loss). Accordingly, net profit after tax equated to ZWL47m at FY20 (FY19: ZWL194m loss; FY18: ZWL22m loss), translating to a return on revenue of 7% (FY20: -22%). GCR takes note of potential strengthening in net profitability which could stem from foreign exchange gains given the increase in foreign denominated policies. The reinsurer’s ability to turnaround underwriting performance and sustain bottom-line profitability may be considered positively in future earnings assessments.

FBC Re’s business profile is assessed as limited, reflected by a market share of 12% in FY20 (FY19: 19%) negatively impacted by local currency denominated policies that were converted to USD policies at later stage compared to peers. The reintroduction of foreign denominated policies is expected to spur a recovery in the reinsurer’s market position to historical levels. The business mix is viewed to be intermediate, with three lines of business contributing materially to revenue. This is nevertheless partially offset by concentration to the primary market, with 96% of premiums underwritten locally. The reinsurer’s ability to recover and maintain its market position over the rating horizon is a key rating consideration.

Outlook statement

The Evolving Outlook, which is bidirectional and therefore demonstrates an equal likelihood of a positive and negative rating actions, reflects the uncertainties presented by the operating environment which could result in earnings strain, negatively impacting risk adjusted capitalisation and liquidity. Conversely, potential exists for a turnaround in earnings which may support risk adjusted capitalisation above current levels. The business profile is expected to remain largely unchanged.

Rating triggers

Reversion to a Stable Outlook may follow a sustained improvement in earnings and risk adjusted capitalisation. This will need to be supported by relative stability in the operating environment.  Furthermore, a material enhancement in the financial profile may result in upward rating action. Downward rating movement could result from sustained weakening in earnings which may negatively impact risk adjusted capitalisation and liquidity.

Analytical contacts

Primary analyst

Linda Matavire

Analyst: Insurance Ratings

Johannesburg, ZA

LindaM@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@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, August 2021

GCR Insurance Sector Risk Scores, April 2021

0263

Ratings history

FBC Reinsurance Company Limited

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Claims paying ability

Initial

National

A-(ZW)

Evolving Outlook

May 2009

Initial

International

B

Stable Outlook

August 2012

Financial strength

Last

National

A(ZW)

Evolving Outlook

September 2020

Last

International

CCC

Stable Outlook

September 2020

Risk Score Summary

Rating Components and Factors

Risk score

 

 

Operating environment

2.75

Country risk score

0.00

Sector risk score

2.75

   

Business profile

(1.75)

Competitive position

(0.75)

Premium diversification

(1.00)

Management and governance

0.00

 

 

Financial profile

2.50

Earnings

0.50

Capitalisation

1.00

Liquidity

1.00

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total score

3.50

Glossary

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

The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. 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 ratings 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 30 June 2021
  • Retrocession cover notes for 2021;
  • Other relevant documents.


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