GCR downgrades Prima Reinsurance Plc’s rating to BBB+(ZM); Rating Watch

29 Nov 2018 In Rating Notifications

GCR downgrades Prima Reinsurance Plc’s rating to BBB+(ZM); Rating Watch

Johannesburg, 29 November 2018—Global Credit Ratings has today downgraded Prima Reinsurance Plc’s national scale claims paying ability rating to BBB+(ZM) from A-(ZM). Furthermore, Global Credit Ratings has downgraded Prima Reinsurance Plc’s international scale claims paying ability rating to B- from B. The ratings have been placed on Rating Watch and will be reviewed in March 2019.

 

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Prima Reinsurance Plc (“Prima Re”) based on the following key factors:

The ratings were downgraded given economic constraints and regulatory challenges that have negatively impacted the reinsurer’s credit profile. In this regard, Prima Re’s business profile has been adversely impacted by increasing competition from regional reinsurers, as well as higher capacity in the underlying cedant market. This has coincided with attempts by the reinsurer to balance growth objectives with the need to manage heightened premium collection challenges. These factors have had a negative impact on Prima Re’s earnings capacity and liquidity, and GCR will monitor developments over the coming three to four months.  Accordingly, the ratings have been placed on Rating Watch and will be reviewed in March 2019.

Prima Re’s underwriting profitability has moderated over the review period, with the escalation in the operating expense base contributing towards reduced underwriting headroom. Despite the relative stabilisation in performance over the past two years (with FY15 having been impacted by significant currency depreciation), underwriting profitability has remained low relative to historical levels, with the two year average underwriting margin equating to 1%, compared to the double digit margin at the start of the review period. The reinsurer’s underwriting profitability is expected to come under further pressure in FY18, given the adoption of IFRS 9 (and impact on premium debtor write-offs) and the anticipated reduction in premium scale. Accordingly, earnings capacity is likely to be subdued over the short to medium term, in the absence of cost containment and a return to positive growth.

A shift in the investment strategy resulted in a reduction in balance sheet liquidity metrics, albeit registering within a very strong range at FY18. In this respect, cash coverage of net technical liabilities equated to 1.4x at FY17 (FY16: 3.7x), while cash coverage of average monthly claims registered at a relatively stable 32 months (FY16: 31 months), following lower claims paid. Note is, however, taken of the potential for liquidity metrics to reduce over the short to medium term (8M F18: 0.9x technical reserve coverage), amidst premium collection challenges and weaker operational performance.

Prima Re’s risk adjusted capital adequacy is viewed to be strong, although has moderated following an increase in aged premium receivables. In this regard, after adjusting for debtors aged above 180 days and the dividend paid in respect of FY17 earnings, the international solvency margin reduced to 126% at FY17 (FY16: 153%) and further to 94% at 8M F18. Furthermore, the rating considers the low capital base in absolute terms (in the context of the regional insurance market), with total capital equating to around USD4.5m at FY17 (FY16: USD4.2m).

Prima Re’s competitive position is viewed to be limited by intensification of competition from regional reinsurers (in the absence of comparable local content legislation), and reduced cessions from underlying direct insurers. The business mix is relatively well diversified, with four lines of business each contributing more than 10% of gross and net premiums. Note is, however, taken of the limited premium scale in absolute terms, with most lines of business generating less than USD1.2m in net premiums.

The international scale rating continues to be impacted by Zambia’s sovereign credit profile, given that the reinsurer’s assets are domiciled locally, while the majority of business is sourced domestically.

The rating is highly sensitive to a weakening in liquidity and / or ongoing earnings pressure. In contrast, positive rating action may follow a stabilisation in the operating environment that supports a sustainable enhancement of scale efficiencies and improved liquidity metrics.

 

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (September 2009) Initial rating (November 2011)
Claims paying ability: BBB+(ZM) Claims paying ability: B
Outlook: Positive Outlook: Stable
   
Last rating (November 2017) Last rating (November 2017)
Claims paying ability: A-(ZM) Claims paying ability: B
Outlook: Negative Outlook: Negative

ANALYTICAL CONTACTS

Primary analyst                                                             
Susan Hawthorne  
Senior Credit Analyst  
(011)784-1771  
.(JavaScript must be enabled to view this email address)  
   

Committee Chairperson

 
Yvonne Mujuru  
Sector Head: Insurance Ratings  
(011) 784-1771  
.(JavaScript must be enabled to view this email address)  

 

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated May 2018

Prima Re rating reports, 2009 - 2018

 

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.

Prima Reinsurance Plc participated in the rating process via 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 Prima Reinsurance Plc.

The information received from Prima Reinsurance Plc and other reliable third parties to accord the credit ratings included:

  • Audited financial statements to 31 December 2017
  • Four years of comparative financial statements to 31 December
  • Unaudited management accounts to 31 August 2018
  • Budgeted financial statements for 2018
  • 2018 retrocession cover notes
  • Other related documents

The ratings above were solicited by, or on behalf of, the rated entity, 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.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
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.
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.
Coverage The scope of the protection provided under a contract of insurance.
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.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Downgrade The assignment of a lower credit rating to an insurer by a credit rating agency. Opposite of upgrade.
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.
International Solvency Margin Measures the ability to cover current year’s written premiums using shareholder’s funds.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
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.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Watch Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.
Receivables Any outstanding debts, current or not, due to be paid to a company in cash.
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.
Reserve An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.
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.
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.
Underwriting Margin Measures efficiency of underwriting and expense management processes.

For a detailed glossary of terms please click here

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.NET/UNDERSTANDINGRATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGSINFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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.

Copyright © 2013 Global Credit Rating Co (Pty) Ltd. INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.