Announcements Insurance Rating Alerts

GCR affirms New National Assurance Company Limited’s rating of A(ZA); Outlook Stable

Rating Action

Johannesburg, 21 November 2019 – GCR Ratings (“GCR”) has affirmed New National Assurance Company Limited’s (“NNAC”) national scale financial strength (formerly claims paying ability) 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

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for NNAC was placed ‘Under Criteria Observation’. GCR finalised the review for NNAC under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for NNAC has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

NNAC’s rating reflects the insurer’s very strong liquidity, coupled with intermediate capitalisation and earnings, which are offset by a comparatively weak business profile.

NNAC’s financial profile is supported by its very strong liquidity, with GCR’s stressed financial asset coverage of net technical liabilities equating to more than 2.5x and coverage of underwriting expenses registering above ten months. This is a function of very conservative asset allocation, which is expected to continue to support very strong liquidity metrics over the outlook horizon.

Risk adjusted capitalisation is viewed to be sound, supported by reduced underwriting risk and limited investment market risk. The assessment of capitalisation nevertheless considered the comparatively thin targeted buffer above the regulatory minimum requirement.

Earnings are assessed to be intermediate, with the insurer having registered small underwriting losses over the review period after adjusting for non-recurring expenses in FY18. In this regard, the five year underwriting margin equated to -1%, while the net margin registered at 3%, although both metrics reflected very low volatility. GCR nevertheless noted the turnaround in performance in FY18 and 9M F19, with the net incurred loss ratio registering at 61% and 58% respectively (compared to the high of 78% in FY15). This points to the insurer’s success in implementing its turnaround strategy, and if sustained, could result in a stronger earnings assessment going forward.

NNAC reflects a very low market share, which is expected to remain well below 1% over the short to medium term, given corrective underwriting and portfolio management in recent years. The overall assessment of the business profile factors in intermediate premium diversification, with a well-diversified spread of business lines offset by geographic concentration to South Africa.

Outlook Statement

The Stable Outlook reflects expectations that improved earnings will support stability in liquidity and capitalisation, while the business profile is not expected to change materially over the outlook horizon.

Rating Triggers

Positive rating action could develop on the back of a sustained improvement in earnings, while maintaining stable credit protection metrics. Conversely, downward rating pressure may arise from a weakening in liquidity or if capitalisation registers below expectations.

Analytical Contacts

Primary analyst Susan Hawthorne Senior Analyst
Johannesburg, ZA Susanh@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA Godfreyc@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, June 2019
GCR Insurance Sector Risk Scores, November 2019

Ratings History

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(ZA) Stable September 2005
Last National A(ZA) Negative June 2018

Risk Score Summary

Risk scores New National Assurance Company Limited
Operating environment 16.25
Country risk score 7.50
Sector risk score 8.75
Business profile -2.50
Competitive position -2.00
Premium diversification -0.50
Management and governance 0.00
Financial profile 0.50
Earnings -0.25
Capitalisation -0.50
Liquidity 1.25
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 14.25

Glossary

Capital The sum of money that is invested to generate proceeds.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
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.
Rating Horizon The rating outlook period
Rating Outlook A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
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 was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to New National Assurance Company Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

New National Assurance Company Limited participated in the rating process via face-to-face 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 New National Assurance Company Limited and other reliable third parties to accord the credit rating included:

  • The audited financial results up to 31 December 2018
  • Four years of comparative audited numbers to 31 December
  • Unaudited management accounts to 30 September 2019
  • Budgeted financial statements to 31 December 2019
  • Other related documents.
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