Johannesburg, 4th November 2019 – GCR Ratings (“GCR”) has revised Emeritus Reinsurance Company Limited’s (“Emeritus Re Malawi”) national scale financial strength (formerly claims paying ability) rating to BB+(MW), from BBB(MW), and the international scale rating to CCC, from B, with both ratings placed on Rating Watch Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Emeritus Reinsurance Company Limited||Financial strength||National||BB+(MW)||Rating Watch Negative|
|International||CCC||Rating Watch Negative|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the ratings for Emeritus Re Malawi were placed ‘Under Criteria Observation’. GCR finalised the review for Emeritus Re Malawi under the released Criteria for Rating Insurance Companies, May 2019. As a result, the ratings for Emeritus Re Malawi have been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Emeritus Re Malawi’s risk adjusted capitalisation measured within a negative and highly rating sensitive range over the review period, with further review year growth in underwriting risk and increased capital exposure to aged premium receivables elevating risks of a drastic reduction in the credit profile. Accordingly, the ratings have been placed on Rating Watch Negative. Furthermore, the business profile is limited and constrained by low reinsurance capacity, although earnings capacity is viewed to be intermediate due to a well contained claims experience that contributed to moderately weak liquidity.
The reinsurer’s risk adjusted capitalisation measured within a very low range largely impacted by an increase in already high exposure to premium receivables. Accordingly, premium receivables aged above 180 days equated to about 51% of capital at FY18 (FY17: 45%), reflecting systematic pressures. Resultantly, the reinsurer’s GCR model capital requirements measured above available capital, posing significant risks to the credit profile. While regulatory solvency is likely to be maintained thinly above minimum requirements through the capitalisation of reserves at year end, GCR views risk adjusted capitalisation to be a major rating concern.
Similarly, liquidity is viewed to be moderately weak with available liquid assets slightly exceeding net technical liabilities. This is viewed to reduce the reinsurer’s ability to meet obligations in an adverse scenario as stressed assets covered net technical liabilities by 1.1x at FY18 and could dip below a rating sensitive 1x in FY19. While coverage of monthly liquidity requirements measured at a healthy 7 months, management’s ability to manage high liquidity risk is viewed to be a key consideration over the rating horizon.
Emeritus Reinsurance Malawi’s business profile is credit negative, reflecting moderation of high market share in the primary market by very limited premium scale and low regional diversification. The reinsurer participates on 30% of industry cessions at a gross premium of USD6.0m (USD5m from Malawi), with high potential for growth presented by premium localisation initiatives by the primary market regulator. However, efforts to increase scale through a ramp up in the premium growth rate (FY18: 18%; FY17: -4.4%) were impacted by a growth skew towards accident risks (representing the major line together with miscellaneous risks in FY18, albeit at low scale), while a concurrent reduction in motor risks was registered largely due to increased premium retention by cedants. In this regard, product risk increased from low to moderately low levels. Going forward, the business profile is likely to remain at similar levels, constrained by high capital strain from current business scale and potential growth.
Earnings capacity is viewed to be intermediate, reflecting the reinsurer’s sound risk selection policies. As such, an average loss ratio of 40% was maintained throughout the review period, although largely negated by a relatively high operating expense ratio (review period average: 32%), which was mainly a function of the predominantly facultative nature of reinsurance cover. Accordingly, the five year underwriting margin equated to 4% over the review period, with moderate support from investment income producing a corresponding return on revenue of 8%. Going forward, underwriting margins could come under pressure as the product mix shifts towards high risk products, albeit with earnings capacity likely to remain within an intermediate range.
Furthermore, Emeritus Re Malawi’s ratings benefit from affiliation with the wider Emeritus International Reinsurance Company Limited, given brand alignment, evidence of history of support and operational integration.
The Rating Watch Negative reflects potential for rapid deterioration in the credit profile should current growth patterns continue against the backdrop of a very limited capital base relative to current risks.
The ratings are likely to be taken off Rating Watch Negative if the reinsurer remedies the vulnerable capital position. An upgrade may be considered on the back of a material improvement in capitalisation, provided exposure to aged premium receivables is sustainably managed.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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, July 2019|
Emeritus Re Malawi
Risk Score Summary
|Risk score||Emeritus Re Malawi|
|Country risk score||1.50|
|Sector risk score||2.75|
|Management and governance||0.00|
|Accident||An unplanned event, unexpected and un-designed, which occurs suddenly and at a definite place.|
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|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.|
|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.|
|Captive Insurance Company||A company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing insurance coverage to the owner or owners.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Catastrophe||An event, which causes a loss of extraordinary magnitude.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|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.|
|Facultative||Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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.|
|Interest||Money paid for the use of money.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|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.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reinstatement||The resumption of coverage under a policy, which has lapsed.|
|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.|
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 Emeritus Reinsurance Company Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Emeritus Reinsurance Company Limited 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 Emeritus Reinsurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial statements as at 31 December 2018;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2019;
- Reinsurance cover notes for 2019;
- Other relevant documents.