Johannesburg, 21 February 2020 – GCR Ratings (“GCR”) has revised Joint Reinsurance Company of Member States of CIMA’s (“CICA Re”) national scale financial strength (formerly claims paying ability) rating to AAA(TG), from AA(TG), with the Outlook accorded as Stable. Furthermore, GCR has affirmed CICA Re’s international scale financial strength (formerly claims paying ability) rating of BB+, with the Outlook maintained at Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Joint Reinsurance Company of Member States of CIMA||Financial strength||National||AAA(TG)||Stable Outlook|
|Financial strength||International||BB+||Stable Outlook|
GCR announced that it had released new criteria for rating supranational institutions in May 2019. Consequently, the rating for CICA Re was placed ‘Under Criteria Observation’. GCR finalised the review for CICA Re under the released Criteria for Rating Supranational Institutions, May 2019. As a result, the rating for CICA Re has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
CICA Re’s financial strength ratings are anchored by its position as the sole treaty established reinsurer in the Conférence Interafricaine des Marchés d’Assurances (“CIMA”) zone executing the risk retention mandate of member states. Further supporting the reinsurer’s credit profile is high membership penetration and region-wide preferential treatment, which largely sustained a strong financial profile over the review period. These factors provide rating uplift to the reinsurer’s predominate exposure to low rated members and a relatively weak operating environment, while counterbalancing comparatively high levels of private shareholding, as well as mandate dilution from high gross premium exposure to markets outside the CIMA zone. Note is, however, taken of potential for the latter to be addressed through legal cessions on facultative risks that are expected to commence in 2020, building buffers within the business profile that could offset related potential strain to the financial profile, underpinning the Stable Outlook.
CICA Re’s operations are concentrated to areas of higher country risk, providing a low anchor to the ratings. While significant forays have been made into external markets, which strengthen blended market strength, limited premium generation in member markets is an offsetting factor. Similarly, low blended credit strength of member states acts as an inherent credit limitation, further exacerbated by dilution from private sector interests, although a level of relief is derived from significant membership penetration. Public members (comprising 12 of the 14 countries within the CIMA zone) accounted for 67% of shareholding at FY18, with remaining private sector shareholding viewed to be relatively high.
However, strong integration within the membership base provides significant credit advantages through region-wide preferential treatment. This is expressed through seniority on private sector obligations and foreign currency access relative to regional reinsurers; exemptions from tax; and legal cessions in member states. Accordingly, GCR has observed relatively low exposure to aged premium receivables, which totalled XOF4bn at FY18, compared to significantly higher levels registered by smaller players in the market, while legal cessions (currently set at 15% of treaty cessions) are set to broaden to 10% of treaty cessions and 5% of every risk written with the zone; thus, encompassing previously excluded facultative risks.
The aforementioned underscore the reinsurer’s sound business profile, with recent changes in legal cessions exhibiting potential to address concerns over relatively high exposure to external business. The CIMA zone comprised 44% of the USD96m gross premium base in FY18 (FY17: 51%), of which 17% was secured through legal cessions. GCR notes limited premiums generated from member countries over the review period, with the largest and top five cedant member countries contributing USD15m and USD33m respectively in FY18, as indicative of the low level of treaty reinsurance in the region, with sizeable risks in the region written on a facultative basis. In this regard, management’s success in leveraging deeper mandate execution off a wider legal cessions base could further strengthen the reinsurer’s mandate, providing buffers to the ratings over the medium term.
The reinsurer’s financial profile is rating positive, reflecting sound risk adjusted capitalisation and healthy earnings capacity, which more than offset weaknesses in liquidity. CICA Re’s earnings capacity is solid underpinned by highly stable underwriting margins, which averaged 10% over the review period, albeit with low average investment returns caused by a sizeable non-earning portion of cedant deposits, coupled with low risk investments, restricting the return on revenue to a corresponding average of 11%. In this regard, the reinsurer exhibited strong risk adjusted capitalisation, with the capital base measuring well above concomitant risks, further supported by capital injections of XOF15bn over the past two years. Going forward, strong capital generation from operations is seen to persist, with outstanding capital calls of XOF11bn to June 2020 expected to absorb the envisaged increase in underwriting risk. However, liquidity is viewed to be a rating weakness despite cash and stressed assets covering net technical liabilities by 1.7x, due to a high proportion (40% of the investment portfolio) of non-yielding cedant deposits, which reduces the availability of cash balances to settle obligations across cedants. In this regard, liquidity metrics are sensitive to the envisaged risk uptake expansion, outstanding capital calls and the ultimate location of liquid assets.
The Stable Outlook reflects GCR’s view that the reinsurer remains relevant and important to its shareholders as evidenced by sound but relatively slow participation in the capital call and the recent widening of legal cessions. Furthermore, the Outlook factors in a possible improvement in mandate from the latter, providing buffers (albeit inadequate to improve the rating) that could counteract potential capital and liquidity strain from resultant aggressive growth.
There is limited scope for an improvement in the international scale rating over the outlook horizon, given inherent structural limitations and headroom within the current rating range. Conversely, downward rating pressure could stem from a material deterioration in credit protection metrics that exceed the expected improvement in the business profile.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Fleur Ngassa||Associate Analyst|
|Johannesburg, ZA||MarlaineN@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Supranational Institutions, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, January 2020|
|GCR Insurance Sector Risk Scores, January 2020|
Risk Score Summary
|Country risk score||4.50|
|Sector risk score||3.50|
|Membership strength and diversity||2.00|
|Status and diversity||0.00|
|Mandate and track-record||2.00|
|Management and governance||0.00|
|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.|
|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 Horizon||The rating outlook period|
|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 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 Joint Reinsurance Company of Member States of CIMA. 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.
Joint Reinsurance Company of Member States of CIMA 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 Joint Reinsurance Company of Member States of CIMA and other reliable third parties to accord the credit rating included:
- The audited financial results up to 31 December 2018;
- Four years of comparative audited numbers to 31 December;
- Budgeted financial statements to 31 December 2019; and
- Other related documents.