Johannesburg, 1 December 2015 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Zambian Reinsurance Company Limited to BBB-(ZM) from BBB(ZM), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has downgraded the international scale claims paying ability rating assigned to Zambian Reinsurance Company Limited to B- from B, with the outlook accorded as Stable. The ratings are valid until November 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Zambian Reinsurance Company Limited’s (“Zambian Re”) based on the following key criteria:
The downgrade primarily reflects Zambian Re’s, sustained weak levels of capitalisation. The adjusted international solvency margin equated to 33% at FYE14 (FYE13: 36%), after netting off premium debtors in excess of 180 days (representing 27% of capital) and dividends paid. On a nominal basis, the international solvency margin registered at a thin 45% at FYE14 (FYE13: 52%), given the limited capital base in absolute terms (USD1.3m). GCR expects solvency to remain at weak levels over the rating horizon, underpinned by constrained earnings capacity, in the absence of any capital injections.
Liquidity metrics were maintained at sound levels with the claims cash coverage equating to an unchanged 11 months at FYE14, while cash covered net technical liabilities by a higher 0.9x (FYE13: 0.8x). Inclusive of other tradeable assets, coverage of net technical liabilities improves to 1x. Going forward, GCR expects liquidity metrics to remain within a sound range, further supported by other tradeable assets in the investment portfolio.
Zambian Re’s competitive position remained modest, given the limited balance sheet size and premium levels in the context of the regional insurance market. Nonetheless, the reinsurer is one of two locally domiciled players in the market. Cognisance is also taken that Zambian Re is part of a larger group, which provides access to technical support and expertise. GCR expects competitive position to remain modest, in the absence of increased balance sheet capacity.
The reinsurer registered volatile underwriting margins over the review period, underpinned by limited scale efficiencies to absorb the fluctuations in the claims experience. Furthermore, investment income was subdued, given the absence of material financial assets offering meaningful returns. As such, GCR expects earnings capacity to remain at weak levels over the rating horizon.
The reinsurer receives non-proportional risk and catastrophe cover administered by the parent, Emeritus International Reinsurance, and secured through rated international reinsurers (led by Trust International Insurance and Reinsurance Company based in Bahrain).
The downgrade of the international scale claims paying ability rating follows the weakening of the reinsurer’s national scale claims paying ability rating, in conjunction with the deterioration in the credit profile of the sovereign. Zambian Re’s international scale claims paying ability rating is expected to remain at this level, until such a time as the standalone credit strength and the sovereign credit rating improves.
The ratings may be upgraded if the reinsurer recapitalises (in line with anticipated regulatory changes), translating into strengthened risk adjusted capital adequacy and liquidity metrics. Furthermore, sustainable growth and consistent underwriting profitability could result in positive rating movement. Conversely, negative rating pressure could arise from further weakening in the reinsurer’s balance sheet capacity. Furthermore, deterioration in liquidity metrics below expectations, coupled with sustained weakening in earnings capacity could lead to negative rating pressure.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2009)||Initial rating (November 2009)|
|Claims paying ability: BBB+(ZM)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2014)||Initial rating (December 2014)|
|Claims paying ability: BBB(ZM)||Claims paying ability: B|
|Outlook: Negative||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Yvonne Masiku||Catherine Zimba|
|Senior Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, updated July 2015
Zambian Reinsurance Company Limited rating reports, 2009-2014
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 were 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Zambian 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 ratings have been disclosed to Zambian Reinsurance Company Limited with no contestation of the rating.
The information received from Zambian Reinsurance Company Limited and other reliable third parties to accord the credit ratings included:
- The latest available audited annual financial statements up to 31 December 2014
- Four years of comparative audited numbers
- Full year detailed budgeted financial statements for 2015
- Most recent year to date management accounts to 30 September 2015
- The current year retrocession cover notes, and
- Other related documents.
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.
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|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.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|Interest||Money paid for the use of money.|
|Liquidity||The speed at which assets can be converted to cash.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||The national scale rating provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||(1) All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. (2) The collection of financial assets constituting an entity’s investment portfolio.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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).|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
For a more detailed glossary of terms/acronyms, please click here
GCR downgrades Zambian Reinsurance Company Limited’s rating to BBB-(ZM); Outlook Stable.