Announcements Insurance Rating Alerts

GCR affirms NamibRe’s international and national scale financial strength ratings of B+ and AA-(NA); Outlooks Stable

Rating action

Johannesburg, 16 November 2020 – GCR Ratings (“GCR”) has affirmed Namibia National Reinsurance Corporation Limited’s (“NamibRe”) national scale financial strength rating of AA-(NA). At the same time, the international scale financial strength rating has been affirmed at B+. Both ratings have been maintained on Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Namibia National Reinsurance Corporation Limited Financial strength International B+ Stable Outlook
National AA-(NA) Stable Outlook

Rating rationale

NamibRe’s ratings balance its strengthened business profile against weaker, although still sound earnings and capitalisation levels, as a result of the on-take of per policy mandatory cessions in FY20.

The implementation of mandatory cessions of 12.5% on all life and non-life insurance policies written and renewed in Namibia as per Pillar I of the Namibia National Reinsurance Corporation Act has been met with contention by local cedants, with a court case ongoing since 2018. However, as the majority of cedants complied with the regulation, the reinsurer’s premium base grew substantially in FY20. As such, GCR considers NamibRe to have a stronger local market position, reflected by a higher share of 45% (FY19: 21%) of domestic market cessions. While GCR notes potential for the ongoing court case to vary the reinsurer’s share of cessions, the reinsurer’s competitive position is likely to remain within an intermediate range. Although the business mix is diversified across at least three material lines of business, note is taken of the reinsurer’s limited participation in other jurisdictions, restraining diversification of risks across markets relative to select peers.

Liquidity metrics remained within a strong range, albeit continued dividend extraction inhibited investment portfolio growth, with a 4% contraction recorded during the review year. This notwithstanding, coverage of net technical liabilities by cash and stressed financial assets registered at a lower 2.1x (FY19: 2.9x), while operational cash coverage equated to 5 months (FY19: 14 months). In GCR’s view, liquidity could come under pressure due to the distribution of dividends and growth in mandatory cession premiums, resulting in increased net technical liabilities.

Risk adjusted capitalisation weakened due to robust growth in the premium base, leading to an increase in insurance risk exposures. As such, the GCR capital adequacy ratio reduced from historically strong levels above 2x to 1.4x (FY19: 2.3x; FY18: 2.2x), albeit remaining sound. Going forward, we expect appropriate capital management measures to sustain the ratio within rating adequate parameters.

Earnings moderated following an increase in claims, aligning underwriting performance with the industry (due to enhanced coverage of local cessions). While the operating expense ratio equated to a lower 13% (FY19: 25%; review period average: 18%), partially benefiting from increased scale efficiencies, the net incurred loss ratio registered at a high 53% (FY19: 27%; review period average: 45%). As such, the underwriting margin lowered markedly to 2% (FY19: 18%; FY18: 17%; review period average: 10%), with underwriting performance likely to remain pressured by a high loss ratio going forward. Bottom-line earnings were supported by sound investment income, with the investment yield measuring at around stable 7% throughout the review period, translating into a return on revenue of 6% (FY19: 19%; review period average: 13%).

Outlook statement

The Stable Outlook is premised on expectations that the reinsurer will maintain a sound financial profile, with the GCR CAR and liquidity ratios expected to remain within the current ranges, supported by measures aimed at containing asset risk and generating sufficient earnings.

Rating triggers

Upward rating movement may follow a sustained strengthening in risk adjusted capitalisation, whilst maintaining strong liquidity. Downward rating movement could result from a sustained deterioration in earnings and risk adjusted capitalisation. In this respect, negative rating action may follow should the GCR CAR register below 1.3x and/or if liquidity moderates below 2.0x.

Analytical contacts

Primary analyst Linda Matavire Analyst: Insurance Ratings
Johannesburg, ZA LindaM@GCRratings.com +27 11 784 1771
Secondary analyst Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Committee chair Sheri Morgan Senior Analyst: Corporate Ratings
Johannesburg, ZA Morgan@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, May 2020
GCR Insurance Sector Risk Scores, July 2020

Ratings history

Namibia National Reinsurance Corporation Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A+(NA) Stable Outlook October 2018
International BB Negative Outlook October 2018
Financial strength Last National AA-(NA) Stable Outlook December 2019
International B+ Stable Outlook December 2019

Risk score summary

Rating components and factors Risk score
Operating environment 11.00
Country risk score 5.50
Sector risk score 5.50
Business profile (0.50)
Competitive position 0.25
Premium diversification (0.75)
Management and governance 0.00
Financial profile 2.25
Earnings 0.25
Capitalisation 0.50
Liquidity 1.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 12.75

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Primary Market The part of the capital markets that deals with the issuance of new securities.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

Subsequent to an appeal by the rated entity, the ratings and outlooks were revised as reflected in the announcement. The credit ratings above were disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the rated entity and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 March 2020;
  • Four years of comparative audited financial statements to 31 March
  • Full year budgeted financial statements for 2020;
  • Unaudited interim results to 31 October 2020;
  • Reinsurance cover notes for 2020; and
  • Other relevant documents.
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