Johannesburg, 29 Jun 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to New National Assurance Company Limited of A(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to New National Assurance Company Limited (“NNAC”) based on the following key criteria:
NNAC’s rating is supported by sound capital adequacy with an interim statutory CAR cover equating to 1.7x at FYE14 (FYE13: 1.6x). GCR expects the insurer to remain adequately capitalised relative to expected Solvency Assessment and Management (“SAM”) parameters, supported by management’s capital target ranges.
GCR expects the insurer’s liquidity metrics to remain within a moderately strong range over the rating horizon, supported by the conservative investment strategy. Cash covered net technical liabilities by a sound 1.5x (FYE13: 1.7x), while claims cash coverage equated to 11 months (FYE13: 14 months).
Reinsurance arrangements are placed with highly rated counterparties, with the maximum net retention per risk and event limited to levels viewed to be conservative.
The insurer expects to moderate its strategic direction over the short to medium term, with an increased focus on specialist business. In this regard, management plans to strategically partner with niche/specialist underwriting management agencies (“UMAs”), while streamlining existing portfolios. In particular, diversification efforts are aimed at increasing the risk base contribution of engineering (which has consistently registered underwriting profits over the review period) and liability. As such, the insurer’s business mix is expected to improve across three specialised lines of business, compared to the historical heavy reliance on property and motor. In GCR’s view, the ability of the insurer to strengthen its competitive positioning, while achieving operational continuity, represents a key rating consideration.
Management expects the underwriting track record to revert to profitability, following three consecutive years of losses (FY14: -0.2%; FY13: -1.2%), supported by the revision in strategic focus. The profit trend may exhibit some margin volatility, stemming from execution risks associated with the change in strategy. Nevertheless, positive impacts are likely to be materially evidenced over the medium term.
NNAC’s business profile remains a relative rating constraint, given the modest market share (FY14: 1.1%) and moderately elevated concentration to two UMAs (FY14: 49%). Despite the cancellation of the second largest UMA in FY15, contributions from the two largest UMAs is likely to remain moderately elevated (50% of gross premiums), given the increased growth expectations from AC&E Group (“the group”). The strategic decision to buy into the group is viewed positively, as this serves as a risk mitigant to revenue, while alignment of systems and processes reduces the operational risk to be managed within the UMA framework.
A proven track record, in terms of attainment of key targets under the revised strategy, resulting in a strengthening in business profile (by way of increased market share and enhanced earnings diversification), and demonstrated improvements in the underwriting profitability, could support upward rating movement over the medium term. Conversely, a downgrade could result from a persistent deterioration in the underwriting result, coupled with risk-adjusted capitalisation contracting below expectations. Furthermore, a significant increase in revenue concentration and/or the loss of one or more profitable portfolios, and the non-replacement thereof impeding diversification efforts, could lead to negative ratings pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2005)|
|Claims paying ability: A-(ZA)|
|Last rating (July 2014)|
|Claims paying ability: A(ZA)|
|Primary Analyst||Committee chairperson|
|Yvonne Masiku||Marc Chadwick|
|Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, updated July 2014
New National Assurance Company Limited (“NNAC”) rating reports, 2005 – 2014
RSA Short Term Insurance Bulletins 2001-2014
RATING LIMITATIONS AND DISCLAIMERS
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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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
New National Assurance Company 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 rating has been disclosed to New National Assurance Company Limited with no contestation of the rating.
The information received from New National Assurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as per 31 Dec 2014
- Unaudited interim results of as at 31 Mar 2015
- Four years of comparative audited numbers
- Budgeted financial statements for 2015
- The current year reinsurance cover notes
- Statutory returns as per 31 Dec 2014 and as at 31 Mar 2015, and
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
|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 more detailed glossary of terms/acronyms used as per GCR insurance glossary, please click here