Johannesburg, 25 November 2014 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Malawi Reinsurance Company Limited of BBB(MW); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to Malawi Reinsurance Company Limited of B; with the outlook accorded as Negative. The rating(s) are valid until August 2015.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Malawi Reinsurance Company Limited (“Malawi Re”) based on the following key criteria:
Malawi Re’s position as the only licensed reinsurer operating in Malawi represents a positive rating factor. The facultative-based approach augments Malawi Re’s strategic positioning by providing a degree of risk selectivity and pricing flexibility. The company forms part of a larger reinsurance group, providing access to technical support. The reinsurer’s business profile is also viewed to benefit from a fair spread of revenue across lines of business.
Liquidity is fairly good, and a relative rating strength. Coverage of technical liabilities has trended within a moderate range just under 1x, while cash caters for approximately 8 months of excess underwriting outflows. The conservative investment strategy bolsters balance sheet quality, and is expected to be maintained over the rating horizon. A net balance due from an indirect shareholder offsets asset quality somewhat.
Capital adequacy has been measured at intermediate levels, and is a neutral factor to the existing rating. The international solvency margin stabilised at 53% in F13, pausing the steady decline previously evidenced due to net premium growth outpacing capital accumulation. Solvency is expected to contract further to 42% in F14 (a function of high growth targets).
Capital management centres on sustaining solvency above statutorily required minimum levels. In light of the high growth targets of the company, coupled with curtailed earnings capacity in terms of historical capital building, GCR views this approach as limited relative to current and potential future capital pressures. Commitments from shareholders to infuse capital have not been executed. This implies a high degree of execution risk in providing the necessary solvency relief from within the group.
Profitability is viewed to be soft, but stable, due to the subdued level of underwriting profitability exhibited in recent years (2% average 3-year margin). With core profit generation suppressed, investment and foreign exchange returns have accounted for approximately 90% of operating profits. While supporting bottom line figures, the transitory state of such returns (stemming from the current atypical exchange and interest rate environment) will see this effect subside over the medium term.
The company’s international scale rating is constrained by the fact that Malawi currently does not have a sovereign rating, and that the bulk of the reinsurer’s assets are vested in Malawi. Further consideration in this regard is given to the uncertain economic environment, which is characterised by high inflationary pressure and the sustained weakness of the Malawi Kwacha against major foreign currencies.
Upward rating movement may be achieved over the medium term should the reinsurer exhibit material strengthening in capitalisation, competitive positioning and profitability. Group considerations may also play a role in positive rating movements going forward. Added downward rating pressure could arise from i) a further decline in the company’s key solvency metrics and/or the adoption of a more aggressive investment strategy ii) a change in the retrocession structure and/or the involvement of affiliated companies in the recovery/ remittance of retrocession balances; iii) an escalation of intercompany balances due (other than forex translation related causes) and iv) further negative rating action affecting shareholder Baobab Re’s rating (s) by GCR.
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|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (September 2008)||Initial rating (September 2008)|
|Claims paying ability: A(MW)||International scale: B+|
|Outlook: Stable||Outlook: Stable|
|Last rating (October 2013)||Last rating (October 2013)|
|Claims paying ability: BBB(MW)||International scale: B|
|Outlook: Negative||Outlook: Negative|
Sector Head: Insurance
Senior Analyst: Insurance
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, Updated July 2014
Malawi Re rating reports 2008 – 2013.
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Malawi Reinsurance Company 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 rating/s has been disclosed to Malawi Reinsurance Company Limited with no contestation of the rating.
The information received from Malawi Reinsurance Company Limited and other reliable third parties to accord the credit rating(s) included the 2013 audited annual financial statements (plus four years of comparative numbers), latest Internal and/or external report to management, full year 2014 budgeted financial statements, year to date management accounts to June 2014, the 2014 retrocession cover notes, and other documentation related to the rating exercise.
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.