Johannesburg, 07 September 2020 – GCR Ratings (“GCR”) has assigned Tropical Reinsurance Company Limited (“Tropical Re”) an international scale financial strength rating of CCC, with a Stable Outlook. Simultaneously, GCR assigned Tropical Re a national scale financial strength rating of BBB+(ZW), with the Outlook accorded as Evolving.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Tropical Reinsurance Company Limited||Financial strength||International||CCC||Stable Outlook|
Tropical Re’s ratings balance the reinsurer’s high-risk operating environment, developing business profile and relative resilience in the financial profile. Despite the difficult review year trading conditions in the primary market, characterised by hyperinflation, the reinsurer maintained an upward progression in market status and healthy through-the-cycle earnings. Furthermore, a relatively insular balance sheet supported strong risk adjusted capitalisation and intermediate liquidity, albeit highly sensitive to unstable macroeconomic and sector dynamics.
The reinsurer’s credit profile is suppressed by very high operating environment risk, with 72% of gross premiums derived from Zimbabwe, while Zambia represents the secondary market at a growing contribution of 27% in FY19 (1H F20: 42%). This notwithstanding, the reinsurer has implemented several measures to mitigate operating environment risks through writing most of the business in foreign currency and locating a growing portion of assets in Botswana, as part of the medium-term regionalisation strategy.
Tropical Re’s competitive position is intermediate. The reinsurer registered a market share of 15% (FY18: 11%) of primary market reinsurance premiums, while rising into the top three short term reinsurers during the review year. In this respect, increased focus on foreign currency business resulted in a relatively lower review period reduction in gross premiums to USD8.8m (FY18: USD13.3m), with most of the book denominated in foreign currency. This is largely supported by the reinsurer’s intermediate premium diversification, which exhibits a more diversified spread of premiums among geographies relative to peers on the back of captive business from related party cedants in Zimbabwe and Zambia. In GCR’s opinion, concentration to group business (representing above 70% of gross premiums in FY19) is to an extent balanced by revenue security presented by common shareholdings, albeit remaining an overall credit negative. Note is taken of management’s efforts to further diversify the cedant base, which could enhance the business profile if a positive trend is sustained over the longer term.
Earnings capacity is viewed to be intermediate, supported by the reinsurer’s cost leadership and competitive loss ratio. In this respect, the five-year average operating expense ratio equated to a competitive 13% providing ample margin headroom, noting corresponding technical margins of above 20%, which could support underwriting margins in the 4%-7% range over the medium term. Furthermore, the review period return on revenue equated to 14%, with revaluation gains on investment property countering monetary losses. Resultantly, the reinsurer registered a lower earnings impact from net balance sheet risks. This is viewed to be essential for earnings consistency over the medium term, given the likely persistence of hyperinflation.
Risk adjusted capitalisation is assessed within a strong range largely benefitting from relative value preservation on the capital base against lowering underwriting risks. The reinsurer’s capital base reduced to USD3.7m at FY19 (FY17: USD4.2m), with a steeper reduction in underwriting risks increasing the GCR capital adequacy requirement (“CAR”) ratio above 2.5x. While GCR notes high capital concentration to investment property (FY19: 69%; FY18: 28%), risks are viewed to be partially offset by high market preference for value preserving assets as well as limited access to inflation linked investments. In this respect, the reinsurer’s risk adjusted capitalisation is susceptible to the interplay of risk exposures and market dynamics that reduces solvency predictability, representing a key rating sensitivity.
Liquidity is intermediate, balancing the reinsurer’s high liquidity coverage metrics and an evolving risk reserving position. Cash and stressed financial assets covered net technical liabilities and operating costs by 3.4x and 4.2 months respectively at FY19, compared to metrics in the 1.5x to 2x range historically. The elevation of liquidity metrics is attributable to high inflation pass-through on the reinsurer’s property portfolio and relatively low reserving levels, with the stabilisation of markets expected to align metrics with the historical trend.
The Evolving Outlook reflects the unstable impact of the economic environment on the reinsurer’s credit protection metrics. In GCR’s view, credit protection metrics could be secured within the current strengthened range should the reinsurer sustain the relative advantage from foreign currency underwriting and an inflation insulated balance sheet. Otherwise, the coverage of net technical reserves by cash and stressed financial assets could revert to around 1.5x and the GCR CAR to below 2x, corresponding to a lower rating. The international scale rating exhibits a wider tolerance range of aforesaid upside and downside risks over the short term, hence the Stable Outlook.
An upgrade of the national scale rating is likely to follow sustained strength in capitalisation and liquidity metrics, coupled with an improvement in asset quality. The rebalancing of assets and premiums towards lower risk jurisdictions could also be positive to the ratings. Negative rating action could result from a sustained lowering in capitalisation and liquidity metrics. Furthermore, should the reinsurer’s capital base be sustained below minimum regulatory requirements beyond current regulatory forbearance (due to market distortions), the ratings could be downgraded.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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|
|Jurisdictional Supplement for Criteria, July 2020|
|GCR Country Risk Scores, June 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Tropical Reinsurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial Strength||Initial/ last||International||CCC||Stable Outlook||September 2020|
|Initial/ last||National||BBB+(ZW)||Evolving Outlook||September 2020|
Risk Score Summary
|Rating Components and Factors||Risk score|
|Country risk score||0.50|
|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.|
|Primary Market||The part of the capital markets that deals with the issuance of new securities.|
|Private||An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.|
|Property||Movable or immovable asset.|
|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.|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Reserves||A portion of funds allocated for an eventuality.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Revaluation||Formal upward or downward adjustment to assets such as property or plant and equipment.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Secondary Market||The secondary market is where securities are bought and sold once they have been issued in the primary markets.|
|Security||One of various instruments used in the capital market to raise funds.|
|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.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Technical Margin||Measures the percentage of net earned premiums remaining after accounting for claims and expenses incurred.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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 Rating
GCR affirms that a.) no part of the rating 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; and c.) such ratings were 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 party. 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 entity and other reliable third parties to accord the credit rating included:
- Audited financial statements as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 30 June 2020
- Reinsurance cover notes for 2020;
- Other relevant documents.
Due to severe foreign currency shortages, hyperinflation and significant monetary and exchange control policy changes over the last 12-18months in our opinion, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment and audited opinions. See the latest Jurisdictional Supplement for Criteria, published July 2020.