Johannesburg, 15 June 2016 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to ZB Reinsurance Limited to A-(ZW) from BBB+(ZW), with the Outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating at B, with the Outlook accorded as Stable. The ratings are valid until May 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ZB Reinsurance Limited (“ZB Re”) based on the following key criteria:
The rating upgrade reflects the material improvement in ZB Re’s exposure to single counterparty risk, coupled with rating consistent strengths in the remaining rating factors. In terms of the former, banking counterparty strength has improved materially since the previous review, with 92% of liquid assets now held with a counterparty that is viewed to be of strong credit quality. Additionally, ZB Re is viewed to evidence very strong liquidity, with cash covering average claims by 17 months, and net technical provisions by 3x, at FYE15. ZB Re’s cash generative capacity has remained healthy throughout the review period, while stability in average claims experience and net technical provisions has facilitated an overall strengthening in liquidity metrics. Liquidity metrics are expected to be sustained within a very strong range in FY16.
ZB Re holds a very strong competitive position. The reinsurer is the largest player in the market, with a market share of 20% in FY15. This position is underpinned by entrenched relationships with key cedants, as well as group synergies that provide technical expertise and risk management.
ZB Re reflects strong capitalisation. Shareholders’ funds equated to USD9.3m at FYE15, with capital growth supported by consistent levels of retained profit over the review period. Risk adjusted capitalisation remained solid in FY15, with the international solvency margin equating to 65% (FY14: 66%). Going forward, risk adjusted capitalisation is expected to remain at strong levels, on the back of sustained capital generation, limitation of asset risk exposure, and an explicit solvency target range. In absolute terms, the scale of the capital base is viewed to be moderate relative to regional competitors (taking the reinsurer’s expansionary targets into account). ZB Re’s financial flexibility is supported by the explicit parental support from ZB Financial Holdings Limited (“ZBFH”). An explicit parental guarantee states that ZBFH (unrated) undertakes to settle all claims legally payable by the reinsurer to the extent that it is unable to meet admitted obligations.
Earnings capacity has measured at moderately strong levels, with the reinsurer’s competitive expense ratio facilitating margin headroom. In this regard, ZB Re has recorded a four year average underwriting margin of 6.6%, and a four year average return on revenue of 8%. Furthermore, limited loss ratio volatility (particularly over the past three years) has promoted earnings consistency. GCR expects profitability to persist within a moderately strong range, supported by continued expense management, stability in the claims ratio range, and containment of maximum deductible levels (less than 1% of capital). GCR’s view of reserving sufficiency is positively impacted by the certification of reserve levels by a qualified actuary.
GCR views country risk factors to be elevated, and a systematic 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 vested in Zimbabwe. While the country has no sovereign rating, it has previously defaulted on payments to international financial institutions.
In view of the industry risk characteristics embodied within the Zimbabwean operating environment, the industry rating ceiling has been capped at A-(ZW) (single A minus). Negative rating sensitivities pertain primarily to reductions in capitalisation, earnings capacity and competitive positioning.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating post dollarisation (May 2009)||Initial rating post dollarisation (May 2011)|
|Claims paying ability: BBB+(ZW)||Claims paying ability: B|
|Outlook: Evolving||Rating Watch: Yes|
|Last rating (May 2015)||Last rating (May 2015)|
|Claims paying ability: BBB+(ZW)||Claims paying ability: B|
|Outlook: Evolving||Outlook: Evolving|
|Sector Head: Insurance Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
ZB Reinsurance Limited rating reports, 2009-2015
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 were 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.
ZB Reinsurance 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 ZB Reinsurance Limited with no contestation of the ratings.
The information received from ZB Reinsurance Limited and other reliable third parties to accord the credit rating included:
- The 2015 audited annual financial statements
- 4 years of comparative audited numbers
- Unaudited interim results as per 31 March 2016
- Budgeted financial statements for 2016
- 2016 reinsurance cover notes
- 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Assets||The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’|
|Balance Sheet||An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.|
|Capacity||The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.|
|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 to agents and brokers.|
|Insurer||The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of an insurer to convert its assets into cash to pay claims if necessary.|
|Loss Ratio||The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Retention||The net amount of risk the ceding company keeps for its own account|
|Risk||Uncertainty as to the outcome of an event when two or more possibilities exist.|
|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.|
|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.|
For a detailed glossary of terms please click here
GCR upgrades ZB Reinsurance Limited’s rating to A-(ZW); Outlook Stable.