Johannesburg, 01 October 2020 – GCR Ratings (“GCR”) has affirmed Emeritus Reinsurance Company Limited’s (“Emeritus Re Malawi”) international scale financial strength rating of CCC. Simultaneously, the national scale financial strength rating of BB+(MW) has been affirmed. Both ratings have been removed from Rating Watch Negative, with the Outlooks accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Emeritus Reinsurance Company Limited||Financial strength||International||CCC||Stable Outlook|
The ratings for Emeritus Re Malawi have been removed from Rating Watch Negative due to improved control of aged premium receivables, resulting in capitalisation and liquidity strengthening to an intermediate range. In GCR’s view, there is fairly high potential for both factors to be sustained within this rating adequate range over the medium term. Overall, the ratings reflect the reinsurer’s high-risk operating environment, which structurally translates into limited market scale and more recently slow (but improving) premium collection, thus constraining the reinsurer’s business profile. Owing to comparatively limited scale, a modest stream of profits has been maintained over the review period, limiting strategically required internal capital and liquidity build, given delayed capital mobilisation at group level.
The business profile assessment balances the reinsurer’s position as the sole local risk carrier in the domestic market, exhibiting a share of domestic market cessions in excess of 25%, with limited gross premium scale and single market focus structured in line with strategy (albeit catered for by credit uplift from the more diversified group profile). The reinsurer registered comparatively low gross premiums of c.USD6.5m despite its strong market share, with scale at net level repressed by a conservative risk appetite, given relative capital constraints.
Earnings capacity is neutral, with the reinsurer’s underwriting margin largely ranging between 2% and 5% over the review period. This is largely a function of a high operating expense ratio of above 40%, offsetting a competitive three-year average net incurred loss ratio of 34%. In GCR’s view, there is high likelihood for the loss ratio to increase above the current range despite stringent risk selection and low retrocession deductibles, given the prominence of fire and accident lines which display respective high severity risk and longer tail. The recent directive to increase incurred but not reported (“IBNR”) reserves could also shift the loss ratio trend upwards. Furthermore, investment income is suppressed by the low investment portfolio base (a function of a low capital base and pressure from cash absorption by receivables) limiting the review period average return on revenue to 7%. In this respect, earnings are likely to moderate slightly, with the underwriting margin expected to measure towards the lower end of the current range over the medium term.
Capitalisation improved to an intermediate range on the back of improved premium collection. Premium receivables aged above 180 days reduced from around MWK1bn to nearly MWK500m at FY19, supporting a GCR capital adequacy requirement (“CAR”) ratio of above 1.5x (FY18: <1x). In this respect, the reinsurer’s ability to sustain risk adjusted capitalisation within the current range represents a key consideration over the rating horizon.
Enhanced working capital management boosted the balance of liquid assets at FY19, resulting in cash and stressed assets coverage of net technical liabilities of 1.5x (FY18: 1.3x). Noteworthy, an industry-wide increase in the level of IBNR through a regulatory directive was alleviated by a benign claims experience during the review year, avoiding a likely dilutive increase in net technical reserves. Going forward, the liquidity assessment is likely to follow progress in managing cash flows and the increase in technical reserves on the back of regulatory pressure as well as an internal drive to increase risk retention.
The ratings of Emeritus Re Malawi derive support from the Emeritus Reinsurance (Private) Limited group, the parent domiciled in Zimbabwe, given brand and strategic alignment as well as shared technical infrastructure.
The Stable Outlook reflects the likely stabilisation of the GCR CAR ratio around 1.5x as well as the maintenance of cash and stressed assets coverage of net technical liabilities around 1.3x. The earnings assessment is largely expected to be unchanged despite the new reserving requirement due to its systematic nature, with the combined ratio likely to range between 95% and 98%. The business profile is unlikely to change over the medium term.
Positive rating action could follow a sustained strengthening of capitalisation and liquidity metrics above expected levels, while maintaining earnings within the current range. Conversely, a deterioration in capitalisation and/ or liquidity could result in negative rating action.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senor Credit Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@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, July 2020|
Emeritus Reinsurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||International||B+||Stable Outlook||September 2008|
|National||A(MW)||Stable Outlook||September 2008|
|Financial strength||Last||International||CCC||Rating Watch Negative||November 2019|
|National||BB+(MW)||Rating Watch Negative||November 2019|
Risk score summary
|Rating Components and Factors||Risk score|
|Country risk score||1.50|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Upgrade||The rating has been raised on its specific scale.|
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 ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to the rated party. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via virtual 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 entities and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year company budgeted financial statements for 2020;
- Unaudited company interim results to 30 June 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.