Johannesburg, 04 May 2016 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Baobab Reinsurance Company (Pvt) Limited to BBB-(ZW) from BB+(ZW); with the Outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating at B-; with the Outlook accorded as Stable. The ratings are valid until April 2017.
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’s liquidity metrics have been measured at strengthened levels, following the USD10m capital injection from existing shareholders in 1H F15. As such, the reinsurer’s liquid assets amounted to USD5.6m at FYE15 (FYE14: USD0.2m). This resulted in liquidity metrics measuring at strong levels, with the cash claims coverage ratio increasing to 18 months (FY14: 0.5 months) and cash coverage of technical liabilities registering at 0.9x at FYE15 (FYE14: 0.0x). Liquidity levels are expected to be sustained between moderately strong and strong levels, with management’s revised investment strategy stipulating that a minimum USD4m has to be held in liquid assets. Note is taken, however, of concentration of liquid funds (60%) in a single banking entity.
The reinsurer reflects a large capital base amounting to USD32m at FYE15 (FY14: USD27m). Nonetheless, risk adjusted capitalisation is viewed to be moderately strong, in light of the sizeable strategic investment holding (FYE15: 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.
Baobab Re displays a very weak level of aggregate underwriting profitability, with margins consistently recorded at loss levels over the review period. This has largely been a function of the reinsurer’s elevated cost base relative to peers and industry norms. Furthermore, the reinsurer’s net incurred loss ratio evidenced increased margin volatility stemming from the loss of scale efficiencies. In light of this, the reinsurer undertook corrective measures to improve operating performance, hinging largely on medium term moderation of operating expenses (with initiatives such as scaling down the workforce to 40 as at 1Q F16, from 71 in FY14), while focussing on increasing business volumes.
The reinsurer reflects an intermediate competitive position, with a market share of 9% in FY15 (FY11: 23%). Cognisance is taken of the reinsurer’s significant loss of market share, following the substantial weakening in liquidity levels over the review period. According to management, the reinsurer is positioned to regain market share, given the improved liquidity position, and the traditional entrenched relationships with a number of top tier cedants in the domestic industry and increasing engagement of the broker market. In GCR’s view, the ability of the reinsurer to increase business volumes and stabilise earnings remains a key rating consideration.
The international scale rating is heavily 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. The highly uncertain socio-political outlook, weak macroeconomic fundamentals and low industry entry barriers present considerable operational challenges.
A demonstrated turnaround in medium term earnings capacity could result in upward movement of the ratings. This would need to be supported by liquidity metrics remaining at strengthened levels. Conversely, the ratings may be downgraded if the reinsurer’s capital base is eroded following deeper than expected underwriting losses on a sustained basis, and/or liquidity metrics deteriorating to weak historic levels.
| 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+ | |
| Outlook: Rating Watch | Outlook: Rating Watch | |
| Last rating (April 2015) | Last rating (April 2015) | |
| Claims paying ability: BB+(ZW) | Claims paying ability: B- | |
| Outlook: Positive | Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst | ||
| Yvonne Masiku | ||
| Senior Credit 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 Short Term Insurance Companies, updated July 2015
Baobab Reinsurance Company (Private) Limited rating reports/announcements, 2010-2015
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 2015 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results as per 31 March 2016
- Budgeted financial statements for 2016
- 2016 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
| Assets | The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’ |
| Balance Sheet | An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date. |
| Capacity | The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace. |
| Claim | A request for payment of a loss, which may come under the terms of an insurance contract. |
| Commission | A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers. |
| Insurer | The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public. |
| Interest | Money paid for the use of money. |
| Liquidity | The ability of an insurer to convert its assets into cash to pay claims if necessary. |
| Loss Ratio | The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves. |
| Policy | The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract. |
| Premium | The price of insurance protection for a specified risk for a specified period of time. |
| Reinsurance | The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company. |
| Reserve | An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. |
| Retention | The net amount of risk the ceding company keeps for its own account |
| Risk | Uncertainty as to the outcome of an event when two or more possibilities exist. |
| 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. |
| 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. |
For a detailed glossary of terms utilised in this announcement please click here
GCR upgrades Baobab Reinsurance Company (Private) Limited’s rating to BBB-(ZW); Outlook Stable.
