Credit Rating measures the risk inherent in a reinsurer’s operations, which affects the sustainable return that may be derived from those operations. The business risk profile is based on an analysis of the reinsurer’s competitive position, modified to incorporate the industry and country risks to which a specific reinsurer is exposed.
strong>Alson Nhari< A credit rating is an independent and forward looking opinion about the ability of a company to meet financial obligations in full and on time. Credit ratings foster development and smooth functioning of reinsurance markets by providing transparent information to market participants. Having a rating is similar to a compass, as a reinsurance buyer, a rating gives you a direction to your purchase. It allows you to see the financial strength of your chosen security. Ratings are accorded by a panel of qualified individuals based on methodologies that are evaluated regularly and updated. Therefore, one person is not solely responsible for a rating, but rather ratings are the collective work of GCR’s experiences Credit ratings typically range from AAA to D and allow companies to make more informed decisions. Rating insights translate complexity into clarity so market participants can make decisions with conviction. Rating Types — A reinsurer’s credit rate can either be a national rating or an international rating. International Scale Ratings rank entities and obligations globally. National Scale Ratings are exclusively an opinion of creditworthiness relative to issuers and financial obligations within a single country. Whilst national scales achieve greater differentiation than the international scale, they do not allow direct comparability outside that jurisdiction. Because Reinsurance Business is international in nature we saw the need to have both the national and international ratings as Tropical Reinsurance Company. Rating Companies — There are several credit rating companies which include Global Credit Rating (GCR), Standard & Poors (S&P), Moody’s and Fitch among others. These companies are independent and provide rating services that are not influenced by companies being rated. As Tropical Reinsurance Company we chose to be rated by GCR because of their huge exposure to the African continent. Although rating agencies adopt different rating scales, there is equivalence across the scales which facilitates comparison such that a BAA1 rating (for example) from Moody’s is equivalent to a BBB+ rating from S&P and BBB+ from Fitch. Rating Methodology — The rating agencies use broadly similar methodologies in arriving at their credit rating determination, although they operate independently of each other and so differences in approach and rating outcome may exist in certain instances and for certain sectors or products, notwithstanding identical information. In general the analysis uses a mixture of qualitative and quantitative indicators and assumptions on two major components being: Business risk Evaluation of strengths/weaknesses of the operations of the entity, including: market position, geographic diversification, sector strengths or weaknesses, market cyclicality, and competitive dynamics. This approach allows businesses to be compared against each other and relative strength/weakness to be identified. Financial risk Evaluation of the financial flexibility of the entity, including: total sales and profitability measures, margins, growth expectations, liquidity, funding diversity and financial forecasts. At the heart of this analysis is credit ratio analysis, which is used to quantitatively position companies of similar business risk against each other Country risk A sovereign credit rating level is a key component of the rating outcome. The general rule says, companies cannot have a rating higher than the credit rating of the country where they operate in—even if the company is a better credit risk than its home country. Corporations generally are not allowed to “pierce the country ceiling.” This policy is based on the belief in the direct correlation, let us say, between sovereign crises and corporate defaults. To B4 However this mind-set of sovereign ceiling policy is not absolute. A sovereign default does not necessarily imply a default of the corporates. It has been noted that “the greater a company’s international diversification, the less likely it is to be affected by a weakening environment in its home country.” Interestingly, the insurance sector and its assets have “high” sensitivity to country risk, which means they are highly sensitive to a combination of economic volatility and potential changes in the legal and regulatory environments. As Tropical Reinsurance Company our rating was significantly affected by the sovereign risk, though we managed to come out with a good rate. Rating Outcome — Credit ratings are expressed on the primary credit ratings scales featuring symbols ‘AAA’ to ‘D’ for long-term credit ratings, and ‘A1+’ to ‘D’ for short-term ratings. Primary credit rating scales may be used to provide Public or Private Ratings. Public Ratings are disclosed and published and reviewed on an ongoing basis. In the case of a Private Rating, the rating is not published, but only provided to the issuer or its agents in the form of a confidential rating letter and/or a confidential rating report. As Tropical Reinsurance Company we have opted for a public rating as evidence of our transparency. Ratings may be upgraded, downgraded, affirmed, qualified, placed on Rating Watch, modified, or withdrawn as a result of changes in, additions to, accuracy of, unavailability or inadequacy of information, or for any reason the rating agency deems sufficient. Rating Outlook - A Rating Outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. It reflects financial or other trends that have not yet reached the level that would trigger a rating action, but which may do so if such trends continue. The outlook may be defined as being “Positive” (the rating symbol may be raised), “Negative” (the rating symbol may be lowered) or “Evolving” (the rating symbol may be raised or lowered). The latter is utilised where the fundamental trend has conflicting elements of both positive and negative. An outlook may be defined as “Stable” if there is nothing to suggest that the rating will change. An outlook is not necessarily a precursor of a rating change or future Rating Watch action. Tropical Reinsurance Company Rating Rating Action – GCR Ratings (“GCR”) assigned Tropical Reinsurance Company Limited a national scale financial strength rating of BBB+(ZW), with an evolving outlook. Rating Rationale - Tropical Reinsurance’s ratings balances our high-risk operating environment, developing business profile and resilience in financial profile. Despite the difficult trading conditions in our primary market, characterised by hyperinflation, Tropical Reinsurance maintained an upward progression in market status and healthy through-the-cycle earnings. Furthermore, we have built an insular balance sheet that supports strong risk adjusted capitalisation and liquidity. Tropical Reinsurance’s competitive position is intermediate. We registered a market share of 15% of Zimbabwean market’s reinsurance premiums, while rising into the top three short term reinsurers. Our Earnings capacity is viewed as intermediate, supported by cost leadership and competitive loss ratio. In this respect, our five-year average operating expense ratio equated to a competitive 13% providing ample margin headroom, noting corresponding technical margins of above 20%, which supports underwriting margins in the 4%-7% range over the medium term. Liquidity is intermediate, balancing Tropical Reinsurance’s high liquidity coverage metrics and an evolving risk reserving position. Our cash and stressed financial assets covers net technical liabilities and operating costs by 3.4x and 4.2 months respectively (FY19), compared to metrics in the 1.5x to 2x range historically. What this means for Tropical Reinsurance & Our Clients Good financial strength ratings from major rating agencies is one of the most important prerequisites for a reinsurer to be able to participate in the reinsurance market. This rating process and outcome shows that as a security we have maintained an upward progression in market status and healthy through the cycle earnings. It is also shows that we have gone further and created an insulated balance sheet that supports risk based capitalisation and liquidity. This position reassures clients of our ability to meet obligations as they fall due. This BBB+ Rating: 1. Enhances our competitiveness on the local regional and African Markets. 2. Gives us access to foreign markets; that doubted Zimbabwean securities. 3. Confirms our resilience even in the wake of COVID 19. This is evidenced by the rating review as at 1 November 2020 which reaffirmed our BBB+ position. 4. Helps in attracting and retaining new business from credit-sensitive brokers and cedants. The rating opinion provided by GCR observes Tropical Reinsurance's ability to pay claims on our policies and contracts in accordance with the terms agreed with the cedants. The main focus of the rating agencies' assessment lied on financial performance, strategic positioning and long-term ability to cover damages. In conclusion below are the fundamentals behind Tropical reinsurance’s rating assessment: • Strong and competitive position • Strong capital and earnings • Moderately risk exposure based on operating environment • Positive Liquidity Position Besides ratings, a reinsurer's reputation in the industry for paying losses must be considered. The ultimate responsibility of an insurance company is to pay claims. That is true of reinsurance companies as well. If the reinsurer you are considering for your program has a poor reputation for responding to loss notices and has a poor track record of timely payments, then you need to consider Tropical Reinsurance Company, a reinsurer with a good track record for paying claims. (Alson Nhari is the current Head of Business Development at Tropical Reinsurance Company. Alson has 11 years of experience in Risk Management & Insurance having worked for risk advisory companies such as Aon Zimbabwe, Marsh Zambia Limited and Alexander Forbes. You can reach him on email@example.com)