Announcements

GCR affirms Nedgroup Insurance Company Limited’s rating of AA-(ZA); Outlook Stable

Johannesburg, 03 Jul 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Nedgroup Insurance Company Limited of AA-(ZA), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Nedgroup Insurance Company Limited of BBB, with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Nedgroup Insurance Company Limited (“NEDIC”) based on the following key criteria:

NEDIC reflects an extremely strong underwriting track record, exceeding the industry average throughout the review period. This is expected to continue in the medium term, although GCR expects the differential to narrow as the insurer grows into more competitive personal lines business. In this regard, note is taken of the insurer’s cautious approach to personal lines expansion, through strategic alliances with established multi-line players, as well as quota share reinsurance cover.

The high degree of policyholder diversification and access to group distribution channels limits risk to revenue generation and profitability, having historically underpinned a high growth trajectory, and serves to partially offset concentration per line of business. Given the increase in the total expense base, successful bedding down of expansion initiatives, together with effective claims controls, are critical to longer term profitability.

Capitalisation is viewed to be strong, with risk adjusted capitalisation measures strengthening over the past two years. Capital management is complemented by an internal economic capital model that is aligned with group policies. Accordingly, GCR expects risk adjusted capitalisation to remain strong going forward, given persistent capital generation, coupled with CAR cover targets. Underwriting risk exposure is well contained by the very low net deductibles relative to capital, supported by the high quality of counterparties on the reinsurance programme.

Strong operating cash flow generation has supported the accumulation of a sizeable investment portfolio, and contributed to an adequate level of liquidity.

NEDIC is wholly owned by Nedbank Group Limited, one of the largest banking institutions in South Africa. The ultimate shareholder, Old Mutual Plc, is rated BBB on an international scale. The shared customer base and branding, as well as the alignment of risk and capital management policies with group policies point to NEDIC’s high level of strategic importance to the group.

The outlook on the international scale rating is aligned with the blanket revision to the outlooks of insurance companies’ international ratings undertaken in October 2014, following the parallel sovereign change.

A further strengthening in NEDIC’s business profile, including enhanced market share and earnings diversification, could give rise to an upward rating adjustment. Furthermore, an upgrade of the shareholder’s rating could result in a rating upgrade. A downward rating movement may be triggered by a sustained deterioration in operating performance that lowers the degree of strategic importance to the group, or a contraction in solvency levels below group capital adequacy targets. Furthermore, a downgrade of the shareholder’s rating may prompt a reduction in NEDIC’s claims paying ability rating.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATINGS HISTORY
     
Initial rating (September 2012)   Initial rating (July 2013)
Claims paying ability: A+(ZA)   Claims paying ability: BBB-
Outlook: Stable   Outlook: Positive
     
Last rating (June 2014)   Last rating (October 2014)
Claims paying ability: AA-(ZA)   Claims paying ability: BBB
Outlook: Stable   Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson  
Marc Chadwick   Sheri Few  
Sector Head: Insurance Ratings   Senior Analyst  
(011) 784-1771   (011) 784-1771  
chadwick@globalratings.net   few@globalratings.net  

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies, updated July 2014

NEDIC rating reports, 2012 – 2014

RSA Short Term Insurance Bulletins 2001-2014

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; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

NEDIC 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 NEDIC with no contestation of the rating.

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

  • Audited financial results as per 31 Dec 2014
  • Unaudited interim results of as at 31 May 2015
  • Four years of comparative audited numbers
  • Budgeted financial statements for 2015
  • Reinsurance details for 2015
  • Statutory returns as per 31 Dec 2014
  • 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.
CAR Capital adequacy requirement.
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.

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