Johannesburg, 12 Sep 2013 — Global Credit Ratings has today downgraded the national scale claims paying ability rating of Baobab Reinsurance Company (Pvt) Ltd to BB+(ZW); with the outlook accorded as Negative. Furthermore, Global Credit Ratings has downgraded the international scale rating assigned to Baobab Reinsurance Company (Pvt) Ltd to B- ; with the outlook accorded as Negative. The rating(s) are valid until 8/2014.
Global Credit Ratings has accorded the above credit rating(s) on Baobab Reinsurance Company (Pvt) Ltd based on the following key criteria:
The rating downgrades take cognisance of: i) a material deterioration in liquidity to negligible levels, which severely undermines Baobab Re’s ability to meet its financial obligations ii) the reinsurer significantly underperformed budget in F12, logging the largest of a series of underwriting losses, partially attributable to material debtors provisioning iii) capital and solvency is underpinned by illiquid investments in subsidiaries and associates, exacerbating liquidity concerns iv) protracted premium collections and large, long outstanding intercompany balances, which further undermine the capital and liquidity position. Given these and other concerns regarding the reinsurer’s operating viability, the ratings have been placed on Negative Outlook.
The reinsurer’s inability to realise cash from operations due to persistent losses (which have been substantial of late) and nominal investment returns, has seen liquid assets dwindle to a low US$0.1m at FYE12, from US$4.4m at FYE09. The cash position for the year to date is little changed. As such, the balance sheet evidences a dire lack of liquidity, with no material improvement envisioned over the short to medium term. Furthermore, while Baobab Re has a sizeable capital base in comparison to its domestic peers, supporting adequate (albeit declining) solvency measures, equity is largely vested in illiquid subsidiary and associate investments. As such, the considerable capital risk inherent in the reinsurer’s investment philosophy is a major constraint to the rating. Moreover, GCR notes significant counterparty risk associated with intragroup transactions. Baobab Re’s cumbersome delivery cost structure is considered unsustainable and serves to exacerbate losses in high claiming years. Furthermore, notwithstanding management’s strategy to broaden the income base and increase operational efficiencies, the benefits are only likely to accrue in the longer term.
While the majority of Baobab Re’s retro counterparties have secure ratings, the international rating is severely constrained by sovereign risk, as the bulk of assets are vested in Zimbabwe. Whilst the country has no sovereign rating, it has previously defaulted on payments to international financial institutions.
In view of the aforementioned rating downgrades, and in the absence of meaningful capital support, upward migration of the ratings is considered unlikely in the short to medium term. Persistent underwriting losses, leading to sustained capital erosion, and further exacerbating the already dire liquidity position, would warrant further downward rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating: post dollarisation (Sep/2010)|
|Claims paying ability: A+(ZW)|
|Last rating (Sep/2012)|
|Claims paying ability: A-(ZW)|
|Primary Analyst||Secondary Analyst|
|Patricia Zvarayi||Damien Dube|
|Senior Analyst||Junior Analyst|
|+27 11 784 1771||+27 11 784 1771|
|Sector Head: Insurance|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
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.
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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.
Baobab Reinsurance Company (Pvt) Ltd 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 Baobab Reinsurance Company (Pvt) Ltd with no contestation of the rating.
The information received from Baobab Reinsurance Company (Pvt) Ltd and other reliable third parties to accord the credit rating included audited 2012 annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements, unaudited year to date management accounts to 30 June 2013, the current year retrocession cover notes, risk management framework, reserving methodologies, and the reinsurer’s capital management policy.