Johannesburg, 08 May 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Baobab Reinsurance Company (Pvt) Limited of BBB-(ZW), with the Outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating of B- assigned to Baobab Reinsurance Company (Pvt) Limited, with the Outlook accorded as Stable. The ratings are valid until April 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Baobab Reinsurance Company (Private) Limited (“Baobab Re”) based on the following key criteria:
Baobab Re reflects a sizeable capital base (FY16: USD33m; FY15: USD32m). Nevertheless, risk adjusted capitalisation is viewed to be moderately strong, given substantial investments in strategic partnerships (FY16: USD26m; FY15: USD28m). In GCR’s view, in a highly stressed scenario impacting the group and/or industry, the reinsurer would likely face challenges in realising material value for these assets, resulting in high risk to capital. While management has indicated plans to trade investments in subsidiaries with the holding company in exchange for liquid assets (as the reinsurer moves to de-risk the balance sheet and comply with new investment thresholds from the regulator), GCR notes delays in achieving the desired balance sheet structure in previous years, with material changes expected over the medium term. As such, the ability of the reinsurer to successfully execute the planned disposals, with funds placed in liquid assets, may result in strengthened risk adjusted capitalisation.
Liquidity is managed within a strong range, supported by management’s commitment to keep a minimum cash balance of USD4m, following the US10m capital injection in FY15. This, coupled with cautious risk assumption, is expected to stabilise coverage of technical liabilities within a strong range (BGT17: 0.8x; FY16: 0.8x), albeit with potential for improvements over the medium term hinging on successful balance sheet restructuring and adherence to the set minimum cash holding target.
Baobab Re’s earnings capacity remained at weak levels, underpinned by higher than anticipated operating expenses (largely due to unexpected one off costs amounting to USD3.3m relating to the restructuring exercise). In this regard, the reinsurer’s operating expense ratio equated to 73% in FY16, measuring well above management’s target of 22%. In GCR’s view, earnings capacity is likely to remain within a limited range over the rating horizon, as the reinsurer beds down the new operating structure. Earnings may also benefit from a lower deductible on the FY17 retrocession program, equating to 1% of FY16 net earned premiums (FY15: 2.5%) per each sizeable loss; thus, moderating loss pressures.
The reinsurer’s intermediate business profile is consistent with short term strategic objectives. Market share on the primary market is expected to remain at 9% in FY17, as prudent underwriting and stringent risk selection restrict premium growth. In this respect, the reinsurer’s premium mix is expected to reflect offsetting movements favouring well margined lines in search for profitable growth. Note is also taken of the potential for increased regional business to change the business profile somewhat over the medium term.
GCR views country risk factors to be elevated, and a systemic rating consideration applicable to reinsurers. Operational challenges are likely to persist over the rating horizon, given the uncertain socio-political outlook, severe liquidity constraints, reduction in banking sector stability and weak macroeconomic fundamentals.
The rating could be upgraded if the reinsurer’s earnings capacity and asset quality sustainably improve, while maintaining liquidity at target levels. Conversely, a downward rating could follow a deterioration in liquidity, asset quality and/or risk adjusted capitalisation.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating post dollarisation (September 2010)||Initial rating post dollarisation (September 2010)|
|Claims paying ability: A+(ZW)||Claims paying ability: B+|
|Rating Watch: Yes||Rating Watch: Yes|
|Last rating (April 2016)||Last rating (April 2016)|
|Claims paying ability: BBB-(ZW)||Claims paying ability: B-|
|Outlook: Stable||Outlook: Stable|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Baobab Reinsurance Company (Private) Limited rating reports/announcements, 2010-2016
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.
Baobab Reinsurance Company (Private) 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 Baobab Reinsurance Company (Private) Limited with no contestation of the ratings.
The information received from Baobab Reinsurance (Private) Limited and other reliable third parties to accord the credit rating included:
- The 2016 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results as per 31 March 2017
- Budgeted financial statements for 2017
- 2017 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.
|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.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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
GCR affirms Baobab Reinsurance Company (Private) Limited’s rating of BBB-(ZW) Outlook Stable.