Johannesburg, 29 November 2018 — Global Credit Ratings has today downgraded Prima Reinsurance Plc’s national scale claims paying ability rating to BBB+(ZM) from A-(ZM). Furthermore, Global Credit Ratings has downgraded Prima Reinsurance Plc’s international scale claims paying ability rating to B- from B. The ratings have been placed on Rating Watch and will be reviewed in March 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Prima Reinsurance Plc (“Prima Re”) based on the following key factors:
The ratings were downgraded given economic constraints and regulatory challenges that have negatively impacted the reinsurer’s credit profile. In this regard, Prima Re’s business profile has been adversely impacted by increasing competition from regional reinsurers, as well as higher capacity in the underlying cedant market. This has coincided with attempts by the reinsurer to balance growth objectives with the need to manage heightened premium collection challenges. These factors have had a negative impact on Prima Re’s earnings capacity and liquidity, and GCR will monitor developments over the coming three to four months. Accordingly, the ratings have been placed on Rating Watch and will be reviewed in March 2019.
Prima Re’s underwriting profitability has moderated over the review period, with the escalation in the operating expense base contributing towards reduced underwriting headroom. Despite the relative stabilisation in performance over the past two years (with FY15 having been impacted by significant currency depreciation), underwriting profitability has remained low relative to historical levels, with the two year average underwriting margin equating to 1%, compared to the double digit margin at the start of the review period. The reinsurer’s underwriting profitability is expected to come under further pressure in FY18, given the adoption of IFRS 9 (and impact on premium debtor write-offs) and the anticipated reduction in premium scale. Accordingly, earnings capacity is likely to be subdued over the short to medium term, in the absence of cost containment and a return to positive growth.
A shift in the investment strategy resulted in a reduction in balance sheet liquidity metrics, albeit registering within a very strong range at FY18. In this respect, cash coverage of net technical liabilities equated to 1.4x at FY17 (FY16: 3.7x), while cash coverage of average monthly claims registered at a relatively stable 32 months (FY16: 31 months), following lower claims paid. Note is, however, taken of the potential for liquidity metrics to reduce over the short to medium term (8M F18: 0.9x technical reserve coverage), amidst premium collection challenges and weaker operational performance.
Prima Re’s risk adjusted capital adequacy is viewed to be strong, although has moderated following an increase in aged premium receivables. In this regard, after adjusting for debtors aged above 180 days and the dividend paid in respect of FY17 earnings, the international solvency margin reduced to 126% at FY17 (FY16: 153%) and further to 94% at 8M F18. Furthermore, the rating considers the low capital base in absolute terms (in the context of the regional insurance market), with total capital equating to around USD4.5m at FY17 (FY16: USD4.2m).
Prima Re’s competitive position is viewed to be limited by intensification of competition from regional reinsurers (in the absence of comparable local content legislation), and reduced cessions from underlying direct insurers. The business mix is relatively well diversified, with four lines of business each contributing more than 10% of gross and net premiums. Note is, however, taken of the limited premium scale in absolute terms, with most lines of business generating less than USD1.2m in net premiums.
The international scale rating continues to be impacted by Zambia’s sovereign credit profile, given that the reinsurer’s assets are domiciled locally, while the majority of business is sourced domestically.
The rating is highly sensitive to a weakening in liquidity and / or ongoing earnings pressure. In contrast, positive rating action may follow a stabilisation in the operating environment that supports a sustainable enhancement of scale efficiencies and improved liquidity metrics.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2009)||Initial rating (November 2011)|
|Claims paying ability: BBB+(ZM)||Claims paying ability: B|
|Outlook: Positive||Outlook: Stable|
|Last rating (November 2017)||Last rating (November 2017)|
|Claims paying ability: A-(ZM)||Claims paying ability: B|
|Outlook: Negative||Outlook: Negative|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Prima Re rating reports, 2009 – 2018
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Prima Reinsurance Plc participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Prima Reinsurance Plc.
The information received from Prima Reinsurance Plc and other reliable third parties to accord the credit ratings included:
- Audited financial statements to 31 December 2017
- Four years of comparative financial statements to 31 December
- Unaudited management accounts to 31 August 2018
- Budgeted financial statements for 2018
- 2018 retrocession cover notes
- Other related documents
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cession||Amount of the insurance ceded to a reinsurer by the original insuring company (cedant) in a reinsurance transaction.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Downgrade||The assignment of a lower credit rating to an insurer by a credit rating agency. Opposite of upgrade.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|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.|
|Total Capital||The sum of owner’s equity and admissible supplementary capital.|
|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.|
For a detailed glossary of terms please click here
GCR downgrades Prima Reinsurance Plc’s rating to BBB+(ZM); Rating Watch