Johannesburg, 21 October 2021 – GCR Ratings (“GCR”) has upgraded Emeritus Reinsurance Company Limited’s (“Emeritus Re Malawi”) national scale financial strength rating to BBB-(MW) from BB+(MW), with the Outlook accorded as Positive. The international scale financial strength rating has been affirmed at CCC, with the Outlook maintained on Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Emeritus Reinsurance Company Limited||Financial strength||International||CCC||Stable Outlook|
The national scale rating for Emeritus Re Malawi has been upgraded due to a sustained reduction in aged receivables, stemming from improved credit controls and a supportive regulatory environment. In this respect, the reinsurer’s risk adjusted capitalisation improved to an intermediate level, rising from previously vulnerable levels. This simultaneously reduced liquidity risk, with metrics having improved to an intermediate range over the past two years. Given the reinsurer’s high risk operating environment, the rating carries a level of stress to cater for downside risks to the recovery in solvency. Earnings are credit neutral. Conversely, the business profile is credit negative due to limited premium scale, as well as single market and product concentration.
Emeritus Re Malawi reined in solvency pressures from growing aged receivables, with the balance aged above 180 days reducing to below MWK441m (FY19: MWK531m) from around MWK1bn in the FY16-FY18 period. Accordingly, an improvement in risk absorbing capital, further buttressed by cumulative review period net profits of MWK1.1bn and a conservative c.80% profit retention, levered risk adjusted capitalisation to 2.1x (FY19: 1.7x), from 1x at FY18. We believe progressive growth in the capital base to MWK2.9bn (USD3.8m versus USD2.4m at the start of the review period) reduces risk of reversal in the solvency trend, while a fair track record in credit control over the past two years, balanced by risks in the operating environment, gives a degree of comfort that solvency levels could be managed within a 1.3x to 2x range over the medium term.
In tandem with better management of reinsurance receivables, liquidity coverage marginally increased to 1.6x at FY20 (FY19: 1.5x; FY18: 1.3x) and the stability of the metric within the current range remains pivoted by consistency in credit controls. Overall, liquidity management is viewed to have improved, demonstrated by increased year-on-year portfolio exposure to liquid assets (68% vs. 59% of the investment portfolio), restrained dividend payments and the clean-up in the balance sheet, with the shareholding in an associate currently held for sale. In this respect, we view current institutional support to liquidity as positive.
Earnings are neutral, balancing a very competitive loss ratio and an inhibitive operating expense ratio. The reinsurer’s net incurred loss ratio averaged 35.2% over the past five years, largely supported by stringent risk selection on mostly facultative covers provided. Contrastingly, the operating expense ratio remained elevated, measuring at around 40% due to limited scale efficiencies, thus limiting underwriting margin headroom under base net commission ratios. In this respect, the underwriting margin is projected to fluctuate within a 2% to 5% range, until further progress in managing operational efficiencies is realised. Investment income is expected to provide progressive support to bottom-line profits as earning assets expand, although with some volatility from listed equity exposures, underpinning stable returns on revenue of around 10% (FY20: 9.7%; FY19: 11.8%).
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 20%, with limited gross premium scale and single geography focus structured in line with strategy. Furthermore, the product mix is concentrated to three short term products. Notwithstanding limited premium scale relative to regional peers, the reinsurer registered a remarkable improvement in gross premiums to c.USD7.3m (FY19: c.USD6.5m), closing the adverse gap. However, net premium scale remains repressed by a conservative risk appetite, due to relative capital constraints, somewhat constraining the business profile assessment.
The Positive Outlook on the national scale rating reflects potential for risk adjusted capitalisation to be sustained above 1.5x over the outlook horizon, due to enhanced institutional measures to improve premium collections as well as regulatory efforts to reduce systematic risks from credit exposures. This will serve to reduce the level of stress built into the ratings. The international scale rating is not expected to change over the medium term as it tolerates both upside and downside risks to the credit profile.
With respect to the national scale rating, positive action could follow the stabilisation of the GCR CAR at levels comfortably above 1.5x, while current liquidity and earnings strength is maintained. Negative rating action could result from an unforeseen material reduction in earnings or credit protection metrics that is likely to be sustained.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@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, October 2021|
|GCR Insurance Sector Risk Scores, September 2021|
Emeritus Reinsurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||International||B+||Stable Outlook||September 2008|
|Initial||National||A(MW)||Stable Outlook||September 2008|
|Financial strength||Last||International||CCC||Stable||October 2020|
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 entity. 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 2020;
- Four years of comparative audited financial statements to 31 December
- Full year company budgeted financial statements for 2021;
- Unaudited company interim results to 30 June 2021; and
- Other relevant documents.