Johannesburg, 21 December 2017 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Zambian Reinsurance Company Limited to BBB(ZM), from BBB-(ZM), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has upgraded the international scale claims paying ability rating assigned to Zambian Reinsurance Company Limited to B, with the outlook accorded as Negative. The ratings are valid until November 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Zambian Reinsurance Company Limited (“Zambian Re”) based on the following key criteria:
Zambian Re’s ratings have been upgraded following recent capital injections, which have underpinned a strengthening in the reinsurer’s financial profile. In this respect, the proceeds from the capital injections are expected to be held in money market funds over the short to medium term, resulting in enhanced liquidity and a strengthening in the insurer’s overall balance sheet profile. Liquidity metrics are expected to remain at strengthened levels over the outlook horizon, although may be impacted by operational cash flow strain and industry wide premium collection challenges.
Furthermore, risk adjusted capitalisation is viewed to have strengthened relative to the weak levels reflected historically. GCR expects capitalisation metrics to be maintained at strengthened levels over the outlook horizon, although noting potential for medium term dilution in the event of continued earnings strain. The assessment further considers the limited capital base in absolute terms (in the context of the regional reinsurance market), with total capital currently equating to approximately USD2m. The net deductible equates to a moderately conservative percentage of capital (after adjusting for the recent capital injections), while the aggregate credit strength of the retrocession panel is supported by participation by larger recognised reinsurers.
The above factors are nevertheless offset by the reinsurer’s weak earnings profile, having been impacted by successive underwriting losses over the past four years. Furthermore, net profitability has been exposed to exchange rate volatility in recent years, with the five year average return on net earned premiums equating to -0.4%. Going forward, underwriting profitability remains susceptible to volatility stemming from an elevated total expense base, although this could be partially offset by the increase in the interest earning asset base. Accordingly, the ability of the reinsurer to achieve a stabilisation in underwriting performance and sustained strengthening in net earnings capacity is likely to be a key medium term rating driver.
Zambian Re’s competitive position is viewed to be intermediate, given the fairly limited participation in total primary market cessions. This is partially offset by the reinsurer’s domestic reinsurance market position, which is supported by the company’s entrenched position and relationships within the local market. The reinsurer’s business mix is relatively well diversified, with four lines of business each contributing more than 10% of gross and net premiums in FY16. Note is, however, taken of the limited premium scale in absolute terms, with most lines of business generating less than USD0.7m in net premiums.
The international scale rating continues to be impacted by Zambia’s sovereign credit profile, given that the bulk of the reinsurer’s assets are domiciled locally, while the majority of business is sourced domestically.
Further positive rating action may be taken if the reinsurer reflects a sustained strengthening in earnings capacity that translates into enhanced internal capital and cash generative capacity. In contrast, negative rating action could arise from a weakening in key liquidity and/or risk adjusted capitalisation metrics, or a reduction in the absolute capital base to the extent that this triggers regulatory action.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2009)||Initial rating (November 2009)|
|Claims paying ability: BBB+(ZM)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2016)||Last rating (December 2016)|
|Claims paying ability: BBB-(ZM)||Claims paying ability: B-|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Zambian Re 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 was 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.
Zambian Reinsurance Company 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 Zambian Reinsurance Company Limited with no contestation of the ratings.
The information received from Zambian Reinsurance Company Limited other reliable third parties to accord the credit ratings included:
- Audited financial statements to 31 December 2016
- Four years of comparative financial statements to 31 December
- Budgeted financial statements to 31 December 2017
- Year to date management accounts to 30 September 2017
- The current year retrocession treaties
- Other relevant company specific information
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|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.|
|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 Base||The issued capital of a company, plus reserves and retained profits.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cession||Amount of the insurance ceded to a reinsurer by the original insuring company (cedant) in a reinsurance transaction.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Earned Premium||That part of the premium applicable to the expired part of the policy period.|
|Exchange Rate||The value of one country’s currency expressed in terms of another.|
|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.|
|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.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|Total Capital||The sum of owner’s equity and admissible supplementary capital.|
|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 assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.|
For a detailed glossary of terms, please click here
GCR upgrades Zambian Reinsurance Company Limited’s rating to BBB(ZM); Outlook Stable