Announcements

GCR has affirmed Baobab Reinsurance Company (Pvt) Ltd’s rating of BB+(ZW); Rating Watch

Johannesburg, 11 Nov 2014 — Global Credit Ratings has today affirmed the national scale claims paying ability rating of Baobab Reinsurance Company (Pvt) Ltd at BB+(ZW); with the Outlook placed on Rating Watch. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating at B-; with the Outlook placed on Rating Watch. The ratings are valid until 04/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Baobab Reinsurance Company (Pvt) Ltd (“Baobab Re”) based on the following key criteria:

The Rating Watch reflects the potential for key rating factors to be impacted in the short term. Baobab Re is currently adopting various remedial measures to address the liquidity strain that GCR views to represent an immediate credit concern. Corrective measures are underpinned by (1) a planned capital injection by 1H F15, and (2) the successful implementation of significant balance sheet and operational restructuring efforts over the short and medium term. In GCR’s view, the successful realisation of these two initiatives could result in material liquidity and operational relief, which is crucial to sustaining Baobab Re’s financial strength going forward. The Rating Watch also indicates that GCR will observe the progress of these two strategies on a more regular basis, monitoring the attainment of key staggered targets.

During the course of 2014, Baobab Re started restructuring its balance sheet, with a view to alleviating short term liquidity pressures. Existing efforts are aimed at realising US$5.7m by FYE14. The reinsurer intends to realise a further US$4m, through the sale of strategic investments by FYE15, while additional positions are planned to be unwound over the medium term. In tandem to this, the reinsurer is making sizeable adjustments to the scale of its workforce, in order to attain sustainable operational profitability over the medium term.

Baobab Re plans to raise a further US$10m in cash through a rights issue to existing shareholders. This, in conjunction with the balance sheet and operational restructuring, is expected to see the company achieve an improved net cash position by FYE15.

The ratings reflect the high level of liquidity strain currently evidenced by the reinsurer. Cash and equivalents amounted to US$0.3m at 3Q F14 (FYE13: US$0.2m), which is expected to remain constrained through to FYE14 (US$0.4m). This is viewed to be insufficient to sustain the reinsurer’s operations, and is very weak relative to net technical liabilities.

Baobab Re displays a very weak level of aggregate underwriting profitability. The deep negative average margin recorded between F12 and F13 (-26%) deteriorated further to -41% in 3Q F14, emanating from both a rise in technical expenses, as well as a spike in the expense ratio. The latter may persist in the short term, as business volumes remain under pressure. Weak profitability has translated into material operational cash flow strain, which has hampered cash flow recoveries.

Similarly, the reinsurer’s capital decreased to US$26.5m by 3Q F14 (FYE13: US$30.7m). Cumulative net retained losses totalled US$4.8m over the review period, of which 121% was generated through realised losses. Taking into account the sizeable contribution of strategic investments to the balance sheet (3Q F14: US$27.7m), GCR views capitalisation and capital quality as an ongoing source of credit weakness requiring immediate attention.

The highly uncertain socio-political outlook, weak macroeconomic fundamentals and low industry entry barriers present considerable operational challenges.

The international rating is severely constrained by sovereign risk, given that the bulk of assets are vested in Zimbabwe. While the country has no sovereign rating, it has previously defaulted on payments to international financial institutions.

Upward movement of the ratings could result following the successful implementation of the above mentioned strategies and the capital injection. Conversely, the ratings may be downgraded if the reinsurer is unable to execute the above mentioned strategies which, coupled with persistent underwriting losses, leads to sustained capital erosion and further weakening in liquidity metrics.

For a detailed glossary of terms utilised in this announcement please click here

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATING HISTORY
Initial rating post dollarisation (Sep/2010) Initial rating post dollarisation (Sep/2010)
Claims paying ability: A+(ZW) Claims paying ability: B+
Outlook: Rating Watch Outlook: Rating Watch
Last rating (Sep/2013) Last rating (Sep/2013)
Claims paying ability: BB+(ZW) Claims paying ability: B-
Outlook: Negative Outlook: Negative

ANALYTICAL CONTACTS
Primary Analyst
Yvonne Masiku
Analyst
(011) 784-1771
Ymasiku@globalratings.net

Committee Chairperson
Marc Chadwick
Sector Head: Insurance
(011) 784-1771
Chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies, July 2014
Baobab Reinsurance Company (Pvt) Ltd rating reports, 2010-2013

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 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 ratings have 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 ratings included the latest available audited annual financial statements for 2013 (plus four years of comparative numbers), latest external auditors report to management for 2013, full year detailed budgeted financial statements for 2014, most recent year to date management accounts to September 2014, and 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.
GCR has affirmed Baobab Reinsurance Company (Pvt) Ltd’s rating of BB+(ZW); Rating Watch

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