Announcements Insurance Rating Alerts

GCR downgrades Prima Re’s national scale rating to BB+(ZM) and international scale rating to CCC; both on Negative Watch

Rating Action

Johannesburg, 20 December 2019 – GCR Ratings (“GCR”) has downgraded Prima Reinsurance Plc’s (“Prima Re”) national scale financial strength (formerly claims paying ability) rating to BB+(ZM) from BBB+(ZM) and international scale financial strength (formerly claims paying ability) rating to CCC from B-, with both ratings maintained on Negative Watch.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Prima Reinsurance Plc Financial strength National BB+(ZM) Negative Watch
Financial strength International CCC Negative Watch

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the ratings for Prima Re were placed ‘Under Criteria Observation’. GCR finalised the review for Prima Re under the released Criteria for Rating Insurance Companies, May 2019. As a result, the ratings for Prima Re have been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The ratings downgrade follows continued pressure in the Zambian operating environment that has resulted in a deterioration in Prima Re’s financial profile, with earnings remaining constrained and capitalisation and liquidity having weakened noticeably at 9M F19. Furthermore, ongoing competitive challenges in the Zambian reinsurance market have contributed to a lowering in GCR’s assessment of Prima Re’s medium term business profile. The ratings are premised on planned remedial action that is expected to improve capitalisation and liquidity over the near term. However, the Negative Watch factors in potential for adverse ratings movements if corrective measures are delayed or do not materialise as expected.

Prima Re’s earnings have reflected high levels of volatility and a weakening trend, following large underwriting losses in FY18 and continuing into FY19 (versus small positive results posted in the prior two years). This has resulted in a reduction in net earnings, with the average return on net earned premiums equating to -2% compared to an average of 11% between FY14 and FY17. GCR expects earnings to remain suppressed over the outlook period, given an elevated expense base and challenges in achieving scale efficiencies.

Furthermore, ongoing challenges with respect to earnings and premium collection have resulted in a material reduction in risk adjusted capitalisation and liquidity. In this respect, GCR’s risk adjusted capital adequacy requirement coverage ratio reduced noticeably from the strong level reflected at FY18, while stressed financial asset coverage of net technical liabilities equated to around 1x from more than 2x at FY18. In this regard, the assessment of Prima Re’s financial profile is sensitive to further negative development if anticipated remedial plans do not materialise within the expected timeframe.

The ratings consider Prima Re’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.

Outlook Statement

The Negative Watch reflects potential for negative rating action if planned remedial action does not materialise as expected, or if there is a further deterioration in premium collections.

Rating Triggers

The ratings may be downgraded if capitalisation and liquidity continue to register at weakened levels, or if there is ongoing pressure on earnings and operational cash flow generation. Conversely, the ratings may be placed on Stable Outlook if liquidity and capitalisation improve in line with expectations.

Analytical Contacts

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

Ratings History

Rating class Rating scale Review Rating Outlook/Watch Date
Claims paying ability National Initial BBB+(ZM) Positive September 2009
Last BBB+(ZM) Rating Watch November 2018
Claims paying ability International Initial B Stable November 2011
Last B- Rating Watch November 2018

Risk Score Summary

Risk scores Prima Reinsurance Plc
Operating environment 5.00
Country risk score 2.25
Sector risk score 2.75
Business profile (2.00)
Competitive position (1.50)
Premium diversification (0.50)
Management and governance 0.00
Financial profile (0.50)
Earnings (0.50)
Capitalisation 0.00
Liquidity 0.00
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 2.50

Glossary

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 Prima Reinsurance Plc. 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.

Prima Reinsurance Plc 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 Prima Reinsurance Plc 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 September 2019
  • Budgeted financial statements to 31 December 2019
  • The current retrocession cover notes
  • Other related documents.
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