Rating action

Johannesburg, 29 January 2021 – GCR Ratings (“GCR”) has affirmed Nouvelle Compagnie Africaine de Réassurances’ (“NCA Re”) national scale financial strength rating of BB_(CI), with a Negative Outlook. Furthermore, the international scale financial strength rating has been affirmed at CCC+, with a Stable Outlook.

Rating rationale

The Negative Outlook on NCA Re’s national scale financial strength rating was maintained because of developing liquidity and earning risks, in addition to the elevated quantum of receivables, limiting the financial profile of the reinsurer. While a higher operating cost structure curtailed earnings in FY19, liquidity was further negatively impacted by asset allocation shift toward high-risk investments. Although the XOF4.0bn capital injected between FY17 and FY19 essentially improved risk adjusted capitalisation, the current capitalisation buffers are not viewed to be sufficient to offset additional near-term risks, in light of premiums receivables remaining elevated, despite the reduction in aged receivables balance as at December 2020.

Liquidity represents a key rating weakness, moderated by higher operational cash requirements and high-risk equity and property investments. In this respect, cash and stressed financial assets coverage of net technical liabilities equated to 1.2x, while coverage of operational cost requirements registered at 16 months in FY19. Although ongoing premium collections efforts are expected to enhance the liquidity potential of the reinsurer, liquidity metrics reflect sensitivity to the current asset allocation and expected earnings strain.

Review year earnings went under pressure emanating from higher operating expenses and net commissions, with their respective ratios equating to 27% and 32% in FY19(five-year average: 21% and 30%). These costs offset a lower claims experience (FY19: 37%; five-year average: 42%), resulting from the ongoing portfolio cleaning exercise and stricter underwriting guidelines, among other implemented claims containment measures. Consequently, the underwriting margin registered at a lower 5% (five-year average: 7%), although sound investment income stabilised net return on revenue around the five-year average of 8%. Similar earnings strain is expected over the medium term, exacerbated by COVID-19 pandemic risks such as limited premium growth potential, collection challenges, as well as lower investment income.

Risk adjusted capitalisation was boosted by the XOF4bn capital injection, with GCR capital adequacy ratio (“CAR”) measuring around 1.0x, after factoring risks arising from elevated exposure to premium receivables. While note is taken of a reduction in premiums receivables balance as at FY20, further improvement in the factor assessment remains contingent upon sustained and/or material reduction in aged receivables balance.

The reinsurer’s business profile remained intermediate, with marketing efforts both in and out of the CIMA zone supporting a healthy premium growth. As such, the reinsurer maintained a well-diversified geographic presence, with three significant markets in the CIMA zone complemented by smaller risk portfolios in multiple markets. However, the product mix remains skewed towards property and accident risks, although there is potential for improved premiums diversification as the entity ventures more into other lines of business.

Outlook statement

The Negative Outlook on the national scale rating reflects expectation that the current capital position will not be sufficient to cater for liquidity and earnings pressures, in addition to persisting risks from the elevated quantum of aged premiums receivables. In the context of mounting earnings pressures due to the COVID-19 pandemic, the reinsurer’s current liquidity and capitalisation buffers may not be sufficient to support the current rating levels.

Rating triggers

The ratings are unlikely to be upgraded over the medium term, although sustained and/or material reduction in aged receivables balance could support reversion of the national scale rating to a Stable Outlook. However, should liquidity remain thinly managed around current levels and/or earnings weaken below expectations, negative rating action may follow. Furthermore, additional accumulation of aged premiums receivable will be negatively viewed.

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Related criteria and research

Ratings history

Nouvelle Compagnie Africaine de Réassurances

Risk score summary

Glossary

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.

The credit ratings have been 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 entity and other reliable third parties to accord credit ratings included:

• Audited financial statements as at 31 December 2019;
• Four years of comparative audited financial statements to 31 December; and
• Other relevant documents.

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