Zimbabwean insurance market placed on rating watch
GCR has placed the Zimbabwean insurance industry on rating watch. The development is a reflection of the tenuous operating environment, as well as significant uncertainty surrounding the regulatory and socio-political climate.
The likelihood of a collapse of key Government of National Unity (“GNU”) structures and a reversal of policies that fostered growth in 2009-10 remains a major threat. Furthermore, ambivalence on key policy issues has constrained meaningful capital inflows. Structural funding issues remain, which include, inter alia; low savings, volatile deposits, limited external support and lines of credit, the absence of risk-free liquid treasury instruments, and the central bank’s constrained ability to act as a lender of last resort. Notwithstanding transitional support currently being extended to the country, and strong indications for substantial FDI (estimated at around US$3bn in 2011-2012), international investors and the donor community at large are likely to postpone major projects until the socio-political environment is more certain.
GCR has encountered instances where auditors’ reports include the opinion that some insurers’ ability to continue to operate as going concerns has been adversely impacted by the challenging operating environment. As evidenced in recent years, insurance penetration is currently being curtailed by the ongoing macroeconomic challenges. An adverse claims environment and elevated delivery costs in particular, should persist in the medium term, driving further underwriting losses. Going forward, industry recovery is likely to be prolonged, while overall profitability remains subdued. Although no sizeable claims have threatened sector viability, heightened business risk is inherent in the current state of formerly idle machinery and low levels of maintenance capex. In addition, although regulatory changes embodied in the proposed Insurance Bill and amendments to the Pensions & Provident Funds Act generally bode positively for the industry, the benefits are only likely to manifest in the long term. In the interim, capital adequacy levels for a number of players are likely to remain subdued. In this regard, liquidity should remain constrained, exacerbated by negative cash flows and protracted cash conversion.
CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.