Johannesburg, 24 May 2017 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Grand Reinsurance Company (Private) Limited to BBB(ZW) from BBB-(ZW), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Grand Reinsurance Company (Private) Limited at B-, with the outlook accorded as Stable. The ratings are valid until May 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Grand Reinsurance Company (Private) Limited (“Grand Re”) based on the following key criteria:
The upgrade reflects Grand Re’s sustained strengthening in earnings capacity, supported by healthy underwriting profitability. This was largely facilitated by improvements in the loss ratio over the last two years (two-year average net incurred loss ratio: 27%) and a competitive cost structure. In this regard, the three year aggregated underwriting margin equated to 16% (FY16: 22%; FY15: 16%). Management expects the underwriting margin to equate to 20% in FY17, factoring in potential for an improved total expense ratio. In GCR’s view, earnings capacity is likely to remain strong over the rating horizon.
The reinsurer reflects a moderately strong competitive position, underpinned by a comparatively high share of short term industry gross premiums, (FY16: 13%). In this regard, Grand Re is the fourth largest player in the local short term reinsurance market. Enhanced market share has been targeted going forward, primarily through increased regional diversification, enhanced brand recognition (given the association with Sanlam) and improved distribution channels.
Capitalisation is viewed to have weakened to an intermediate level, from strong levels previously. In this respect, the capital base amounted to a lower USD5.3m at FY16 (FY15: USD13.2m), on the back of a USD8.5m write off relating to a strategic investment, as well as a dividend payment of USD0.8m. Nonetheless, the international solvency margin registered at a high 76% at FY16. Sound internal capital generation, together with fairly conservative dividend distributions, are likely to underpin a high level of risk adjusted capitalisation over the rating horizon.
The liquidity profile is viewed to be intermediate, with moderately strong metrics being offset by moderately weak aggregated banking counterparty strength. In this respect, cash covered net technical provisions by 0.6x, while the claims cash cover ratio equated to 23 months at FY16 (FY15: 0.8x and 32 months respectively). Nonetheless, the majority of funds are placed either with unrated entities or financial institutions with a maximum rating of BBB-(ZW). The liquidity profile is likely to remain within an intermediate range, underpinned by sound operating cash flow generation, stringent debt management practices and balanced asset allocation, and barring any changes in banking counterparty exposure.
GCR views country risk factors to be elevated, and a systemic rating consideration applicable to reinsurers’ national scale ratings. Operational challenges are likely to persist given the uncertain socio-political outlook, severe liquidity strain, reduction in banking sector stability and weak macroeconomic fundamentals. Furthermore, the international scale rating is heavily constrained by sovereign risk, given that the bulk of assets are domiciled in Zimbabwe. While the country has no sovereign rating, it has previously defaulted on payments to international financial institutions.
Upward rating movement could to stem from an improvement in capitalisation and/or liquidity (with a concomitant strengthening in aggregated banking counterparty exposure). This would need to be supported by earnings capacity registering within a strong range. Conversely, negative rating sensitivities pertain primarily to reductions in earnings capacity, capitalisation and liquidity and/or a weakening in aggregated banking counterparty strength.
NATIONAL SCALE RATINGS HISTORY
INTERNATIONAL SCALE RATING HISTORY
|Initial rating (September 2009)||Initial rating (September 2009)|
|Claims paying ability: BBB(ZW)||Claims paying ability: B-|
|Outlook: Stable||Outlook: Stable|
|Last rating (July 2016)||Last rating (July 2016)|
|Claims paying ability: BBB-(ZW)||Claims paying ability: B-|
|Outlook: Positive||Outlook: Stable|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Grand Reinsurance Company (Private) Limited rating reports, 2009-2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Grand Reinsurance Company (Private) Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Grand Reinsurance Company (Private) Limited with no contestation of the ratings.
The information received from Grand Reinsurance Company (Private) Limited and other reliable third parties to accord the credit rating included:
- The 2016 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results to 31 March 2017
- Budgeted financial statements for 2017
- Other related documents.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
|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.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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.|
|International Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms utilised please click here
GCR upgrades Grand Reinsurance Company (Private) Limited’s rating to BBB(ZW); Outlook Stable.