Johannesburg, 24 Jun 2014 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Grand Reinsurance Company Limited to BBB-(ZW) with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Grand Reinsurance Company Limited of B- with the outlook accorded as Stable. The rating(s) are valid until 05/2015.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Grand Reinsurance Company Limited (“Grand Re”) based on the following key criteria:
Grand Re is a wholly owned subsidiary of Freecor Holdings (“Freecor”). Freecor is in turn 100% owned by TA Holdings Limited (“TA Holdings”), a Zimbabwean investment company whose portfolio spans insurance, agro-chemicals and hospitality across sub-Saharan Africa. A sizeable 53% of the group’s assets are held outside Zimbabwe, specifically in Botswana and Uganda. TA Holdings’ major shareholder is FMI Investments (Pvt) Ltd (“FMI”), with a 30% stake. Other shareholders include Old Mutual Life Assurance (14%) and Masawara (Mauritius) Limited (9%). FMI is the investment arm of FMI Zimbabwe (Pvt) Ltd, which is in turn wholly owned by Masawara Mauritius Limited.
Grand Re’s key liquidity metrics remain markedly constrained and continue to track well below prudential levels (both relative to net claims and net technical liabilities). This implies heightened liquidity risk, which is envisaged to prevail over the short to medium term in the absence of a revision in asset allocation. This is further exacerbated by limited liquidity relief from the remainder of the balance sheet, with a long term property subsidiary investment dominating the investment mix (at a high 93% of invested assets at FYE13). In the context of the predominantly short dated insurance liabilities, this points to a significant asset-liability mismatch, which serves to notably constrain the rating.
Note is taken of Grand Re’s sizeable capital base, which continues to support above industry average international solvency margins. However, the reinsurer’s solvency position is significantly underpinned by property revaluation gains. Stressing capital for the associated balances, solvency reduces sharply, which implies heightened capital risk. Furthermore, the reinsurer has exhibited a volatile underwriting performance over the review period, with an underwriting loss recorded in F13. Going forward, margin pressure is expected to persist, with the reinsurer’s ability to absorb operating costs curtailed by a marked loss in premium scale.
As the bulk of Grand Re’s assets are domiciled in Zimbabwe, the international rating is significantly constrained by sovereign risk. Although the country has no sovereign rating, it has previously defaulted on payments to international financial institutions.
In view of the recent downgrade, a near term upward movement of the rating is deemed unlikely. Rating strength could, however, develop over the medium term, on the back of consistent net profitability, and a notable strengthening in key liquidity metrics, aided by improved asset-liability matching. Downward rating pressure may emanate from a persistent downward trend in underwriting performance, and a further weakening in liquidity metrics. Note was also taken of the highly uncertain socio-political outlook, which is likely to exacerbate challenges within the operating climate, constraining capital inflows and economic growth. Should this deteriorate further, the rating ceiling of the insurance sector as a whole would likely be reviewed.
For a detailed glossary of terms utilised in this announcement please click here
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (Sep/2009)||Initial rating (Sep/2009)|
|Claims paying ability: BBB(ZW)||Claims paying ability: B-|
|Outlook: Stable||Outlook: Stable|
|Last rating (May/2013)||Last rating (May/2013)|
|Claims paying ability: BBB(ZW)||Claims paying ability: B-|
|Outlook: Negative||Outlook: Stable|
Sector Head: Insurance
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies (July 2013)
Grand Re rating reports, 2009-2013
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Grand Reinsurance Company Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Grand Reinsurance Company Limited with no contestation of the rating.
The information received from Grand Reinsurance Company Limited and other reliable third parties to accord the credit rating(s) included the 2013 unaudited annual financial statements, full year detailed budgeted financial statements, unaudited management accounts to March 2014, the 2014 retrocession cover notes, and other non-public information relating to the rating.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.