Johannesburg, 29th July 2021 – GCR Ratings (“GCR”) has affirmed New National Assurance Company Limited’s (“NNAC”) national scale financial strength rating of A(ZA), with a Stable Outlook.
|Rated entity / issue||Rating class||Rating scale||Rating||Outlook/Watch|
|New National Assurance Company Limited||Financial strength||National||A(ZA)||Stable Outlook|
NNAC’s national scale financial strength rating balances very strong liquidity and adequate capitalisation, against a weaking earnings profile. Further restraining the underwriter’s credit profile is a very limited business position, reflecting its fringe status within the local short-term insurance space, and moderate levels of premium diversification.
Earnings evidenced some degree of resilience in the face of Covid-19 related challenges, underpinned by a favourable claims trend and more recently premium growth resumption (bringing stability in the net risk base). However, net claims incurred spiked in Q1 F21 following a large marine loss, with the underwriter’s loss ratio topping 73% (Q1 FY20: 56%; FY20: 56%; review period average: 63%), effectively reversing advances in claims experience registered over the last years. This was further exacerbated by simultaneous impairment of material premiums receivables (R34m) from Insure Group Managers (“IGM”) and equity investments (R8m) held with the same counterparty. Accordingly, NNAC’s underwriting margin slipped back into the negative territory, equating to -69% (Q1 F20: 2%; prior two-year average: 2%), with the return on revenue closing the quarter at -54% (FY20: 14%). Although the later exposure is considered non-recurring, with the full impact expected be diluted over the remaining quarters of the year, the insurer’s future earnings profile reflects some level of sensitivity to frequent and potentially large losses.
Risk adjusted capitalisation is assessed within an intermediate range, supported by the maintenance of eligible funds sufficient to absorb aggregate risk exposures. In this respect, the SCR cover was sustained within rating adequate levels, despite moderating to 1.15x at Q1 F21 (FY20: 1.21x; FY19: 1.29x) due to the aforesaid impairments, and growing exposure to underwriting risks. Notwithstanding the observed sensitivity to the recent earnings shock, risk adjusted capitalisation is expected to continue measuring within an intermediate range, based on prospects of earnings smoothening over the remaining quarters of FY21, with the SCR cover likely to float within the targeted range of 1.15x – 1.30x over the next 12 months.
Liquidity is assessed within a very strong range, underpinned by a sizeable and conservatively invested asset portfolio relative to net technical obligations. In this respect, cash and stressed financial assets coverage of net technical liabilities and operational cost requirements was sustained above 2.5x and 12 months at FY20, respectively. GCR believes the insurer holds sufficient liquid assets to absorb potential risks that may arise over the rating horizon.
The business profile is credit negative, reflecting moderate levels of premium diversification coupled with NNAC’s fringe position within the local short-term insurance space. Despite the product mix exhibiting healthy levels of premium distribution across four major lines of business at both gross and net levels, the net risk base is considered low in global terms due to substantial utilisation of reinsurance protection in line with strategic objectives. Premium diversification assessment is further constrained by business concentration within South Africa. Following two successive years of premium contraction largely attributable to a portfolio remediation exercise, NNAC’s gross premium base advanced 4% to R736m in FY20, driven by an upturn in fire and transport risks. Nevertheless, the underwriter maintained a stable market share of c. 0.5%, while its premium scale continued to measure below that of an average player in the market (relative market share of c. 0.4x). Accordingly, the insurer’s ability to reach critical mass while maintaining portfolio quality is likely to be a key consideration over the medium to longer term.
The Stable Outlook captures potential for further moderation in earnings, which is expected to be balanced out by existing liquidity buffers. In this respect, both the underwriting margin and return on revenue is projected to trend in the negative territory at the close of the current year, reflecting the impact of IGM impairment, while the liquidity ratio may continue to register above 2x. The Outlook further incorporates risk adjusted capitalisation’s sensitivity to sustained earnings moderation, although the entity’s SCR cover may continue to measure within the targeted SCR corridor of 1.15x – 1.30x over the next 12 months.
Downward rating movement may follow should earnings deteriorate below expectations, negatively impacting capitalisation and liquidity. A positive and persistent earnings trend could warrant an upward rating action, while capitalisation and/or liquidity are maintained at strong levels.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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, July 2021|
|GCR Insurance Sector Risk Scores, July 2021|
New National Assurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Financial strength||Initial*||National||A-(ZA)||Stable Outlook||September 2005|
|Last||National||A(ZA)||Stable Outlook||July 2020|
*Formerly claims paying ability.
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||8.00|
|Management and governance||0.00|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. 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 rating included:
- Audited annual financial statements to 31 December 2020;
- Four years of comparative audited financial statements to 31 December;
- Full year budgeted financial statements for 2021;
- Unaudited management accounts to 31 March 2021;
- Annual quantitative statutory return at 31 December 2020;
- A summary of the current reinsurance programme; and
- Other relevant documents