Johannesburg, 07 Oct 2013 — Global Credit Ratings has today downgraded the national scale claims paying ability rating of Malawi Reinsurance Company Limited to BBB(MW); with the outlook accorded as Negative. 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 8/2014.
Global Credit Ratings has accorded the above credit rating(s) on Malawi Reinsurance Company Limited based on the following key criteria:
Malawi Reinsurance Company Limited (“Malawi Re”) is the only domestically registered reinsurer in Malawi. The company is a 99% owned subsidiary of Emeritus International Reinsurance Company (“Emeritus”). Emeritus in turn is a 100% held subsidiary of Baobab Reinsurance Company (Pvt) Limited (“Baobab Re”), a Zimbabwe based regional reinsurance group.
The rating action taken is reflective of a persistent decline in international solvency over the review period, from 92% in F08 to a low of 54% in F12. For F13, a further decline to 45% is forecast, which is not commensurate with the current rating. The solvency position is further undermined by a sizeable, non-interest bearing net balance due from parent Baobab Re, which amounted to MK102m or 14% of FYE12 capital (F12 adjusted solvency: 46%). Given the recent downgrade by GCR of Baobab Re’s domestic rating from A-(ZW) to BB+(ZW), and its international rating from B to B- (in part due to severe liquidity strain), this implies heightened intercompany risk. Moreover, the subdued level of underwriting profitability exhibited in recent years (2% margin in F12) serves to constrain the company’s earning capacity, owing to elevated net acquisition costs and an atypically high operating cost base. This is, in part, a function of the reinsurer’s relatively shallow domestic market penetration (15% of total domestic cessions in F12), which causes Malawi Re to resort mainly to administrative and burdensome facultative inward transactions to accommodate its limited underwriting capacity. In view of the underdeveloped domestic investment market, the reinsurer continues to apply a conservative investment stance, which is supportive of adequate liquidity. According to management, no material change to the investment strategy is envisaged over the short to 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 Malawi Re’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.
Debt rose significantly to a high of N901.5m at FYE12, to fund expansion, net gearing at 147% and net debt to EBITDA at 240%. However, if the N420m in preference share Issue is stripped out of debt and included in equity (as it has no maturity date or interest obligations), net gearing and net debt to EBITDA would be much lower at 37% and 108% respectively. With no further borrowings expected in the medium term, gearing metrics are budgeted to reduce going forward as earnings derive from new restaurants and debt is repaid.
In view of the recent downgrade of the rating, an upward revision of the ratings is considered unlikely over the short to medium term. 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) a further escalation of the intercompany balance due (other than forex translation related causes) and iv) a further downgrade of Baobab Re’s rating (s) by GCR.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (Sep/2008)||Initial rating (Sep/2008)|
|Claims paying ability: A(MW)||Claims paying ability: B+|
|Outlook: Stable||Outlook: Stable|
|Last rating (Nov/2012)||Last rating (Nov/2012)|
|Claims paying ability: A-(MW)||Claims paying ability: B|
|Outlook: Negative||Outlook: Stable|
|+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.
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 included 2012 audited annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements for 2013, unaudited year to date management accounts to 30 June 2013, the 2013 retrocession cover notes, Statutory returns for 2012 and 2013, and other non-public statistical information.