Johannesburg, 21 November 2019 – GCR Ratings (“GCR”) has revised Zimnat Life Assurance Company Limited’s (“Zimnat Life”) national scale financial strength rating to A(ZW), from A-(ZW), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Zimnat Life Assurance Company Limited||Financial strength||National||A(ZW)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Zimnat Life was placed ‘Under Criteria Observation’. GCR finalised the review for Zimnat Life under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Zimnat Life has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Zimnat Life’s national scale financial strength rating is supported by a solid earnings track record that underpinned risk adjusted capitalisation within a very strong range over the review period. This counterbalanced suppression of the business profile and liquidity to limited levels by overarching operating environment challenges, with current buffers expected to maintain overall credit strength at rating adequate levels over the medium term.
The insurer displays strong earnings capacity, supported by a highly competitive bottom-line performance. This is largely due to a fairly competitive technical performance on insurance contracts, which is uplifted by fee based income derived from the sizeable investment contracts portfolio. In this regard, the review period average return on revenue increased to 26% from an average operating margin of 13%. However, given a high level of uncertainty in the operating environment, the earnings assessment factors in potential moderation over the developing cycle.
Consistent capital build from operations contributed to strong risk adjusted capitalisation, advancing the capital base well above concomitant risks over the review period (17% average annual growth). In particular, low levels of insurance risk stemming from the predominantly short term nature of risk products, counteracted relatively high market exposure and a review year increase in counterparty risk. Looking ahead, GCR has incorporated a potential moderation in risk adjusted capitalisation from a possible elevation in market risk.
Accordingly, liquidity is viewed to be moderately weak and likely to remain under pressure. Cash and stressed financial assets coverage of net technical liabilities reduced to 1.1x (FY17: 1.2x), while operational cash coverage remained healthy at 12.3 months, with metrics likely to measure within a similar range over the rating horizon.
Zimnat Life’s moderately weak competitive position reflects the insurer’s mid-tier market position, accounting for a market share of 4.9%, which was offset by a limited relative market share of 0.5x in FY18. In this regard, increased focus on managing business persistency rates through enhancing the customer value proposition and brand recognition facilitated an annual average gross premium growth rate of 12% over the review period. Going forward, improved brand equity in confidence sensitive market segments could, somewhat, enhance the defensiveness of the business model, amidst high market uncertainty.
Premium diversification is viewed to be moderately limited due to geographic focus on one market, albeit with a well spread product mix providing a diverse income stream. Furthermore, the retail nature of a significant proportion of the risk products portfolio limits aggregate product risk to low levels. However, the challenging environment is viewed to limit product penetration (especially on long term risk products), limiting the scope for a significant change in the product mix over the medium term.
The stable outlook reflects expectations of capital and earnings strength over the outlook horizon, despite the persistent challenges in the operating environment, while the business profile remains comparatively limited.
An upward rating movement may stem from an improvement in the business profile and/ or liquidity. Conversely, the rating could be downgraded on sustained weakness in liquidity or a deterioration in earnings and risk adjusted capitalisation below expected levels.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||Godfreyc@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senior Analyst|
|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, June 2019|
|GCR Insurance Sector Risk Scores, November 2019|
|Jurisdictional supplement for Criteria, August 2019|
Zimnat Life Assurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Financial Strength||Initial||National||BBB+(ZW)||Stable||November 2011|
Risk Score Summary
|Risk scores||Zimnat Life|
|Country risk score||0.00|
|Sector risk score||3.25|
|Management and governance||0.00|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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 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 rating was based solely on the merits of rated entities, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Zimnat Life Assurance Company Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Zimnat Life Assurance 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 Zimnat Life Assurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2018;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2019;
- Unaudited interim results to 30 September 2019;
- Actuarial valuation report for 2018;
- Reinsurance cover notes for 2019; and
- Other relevant documents.