Johannesburg, 7 July 2020 – GCR Ratings (“GCR”) downgrades Old Mutual Insurance Company Limited’s (“OMICO”) national scale financial strength rating to AA-(ZW) from AAA(ZW), with the Outlook accorded as Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Old Mutual Insurance Company Limited||Financial strength||National||AA-(ZW)||Negative Outlook|
OMICO’s downgrade emanates from a weakening in the insurer’s financial profile due to significant losses on net monetary assets in a hyperinflationary environment. Resultantly, earnings capacity measured in a very weak range in inflation adjusted terms, while previously strong risk adjusted capitalisation and liquidity moderated to an intermediate range. The business profile remains moderately strong, albeit under pressure. This notwithstanding, the rating derives uplift from implied parental support from Old Mutual Zimbabwe Limited Group (“the group”), given strong operational and brand alignment. The Negative Outlook reflects potential for net monetary losses and negative real yields on the investment portfolio to further depress the financial profile.
Underwriting deficits over the past two years, driven by a high cost base and unfavourable claims experience compounded earnings pressure resulting in a net loss after tax of ZWL242m (FY18: ZWL117m profit). As such, average underwriting margin and return on revenue measured within a deep negative range. Going forward, earnings are likely to remain suppressed, given the hyperinflationary environment and uncertainty arising from COVID-19 pandemic risks over the outlook horizon.
The insurer’s capital base reduced drastically to USD9.6m (FY18: USD48.5m), while market risk remained fairly elevated, as a result of value preserving assets, which comprised 73% (FY18: 84%) of the investment portfolio. In this respect, risk adjusted capitalisation weakened, with the GCR capital adequacy ratio (“CAR”) registering at a lower 1.1x at FY19 (FY18: 2.0x). Risk adjusted capitalisation is likely to moderate further over the outlook horizon in the absence of enhanced balance sheet insulation from inflation.
Relatively lower asset inflation on the investment portfolio, resulted in non-cash investments losing value to ZWL135m (FY19: ZWL293m), while cash investments displayed better resilience at a stable ZWL51m, due to significant USD cash holdings. In this respect, cash and stressed assets coverage of net technical liabilities reduced to 2.1x (FY18: 2.5x), while operational cash coverage registered at 6.8 months (FY18: 11months). Going forward, liquidity is sensitive to the performance of the investment portfolio relative to the uptake of business that is repricing with inflation.
OMICO’s business profile is supported by a strong market position, partially offset by limited premium diversification. The insurer has registered a strong competitive position, albeit with a sustained weakening in the market position over the past three years (note is taken of the insurer’s relatively higher retention to peers). In this regard, market share registered at a lower 12% (FY18: 15%; FY17: 16%), with a largely unchanged size and structure of the policyholder book, as per management’s assessment, potentially supporting a recovery in market share as risk pricing dynamic stabilise. The business mix is viewed to be well spread, with four lines of business contributing materially to revenue, partially offset by the insurer’s domestic market focus.
GCR expects persistent earnings pressure from the mismatch between monetary assets and liabilities, as well as negative real returns on non-cash investments, to subdue the financial profile further in FY20, compounded by the impact of the COVID-19 pandemic. OMICO’s competitive position is expected to be maintained at similar levels over the medium term as insurers adapt to strategies that preserve longer term underwriting capacity.
Conversion to a Stable Outlook may follow a sustained improvement in earnings and risk adjusted capitalisation, while maintaining adequate liquidity and strong competitive position. Conversely, downward rating would result from persistent earnings pressure, weakening risk adjusted capitalisation and a persistent weakening in market position.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Secondary Analyst||Linda Matavire||Insurance Associate|
|Johannesburg, ZA||LindaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@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, May 2020|
|GCR Insurance Sector Risk Scores, June 2020|
Old Mutual Insurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A-(ZW)||Stable Outlook||May 2009|
|Financial Strength||Last||National||AAA(ZW)||Stable Outlook||September 2019|
Risk score summary
|Rating Components and Factors||Risk score|
|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.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|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.|
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 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 entity. The rating above 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 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 from the rated entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 30 May 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.