Announcements Insurance Rating Alerts

GCR affirms NICO General Insurance Company Limited’s rating of AA(MW); Outlook Stable

Credit Rating Action

Johannesburg, 4 November 2020 – GCR Ratings (“GCR”) has affirmed NICO General Insurance Company Limited’s (“NICO General Malawi”) national scale financial strength of AA(MW), with the Outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
NICO General Insurance Company Limited Financial strength National AA(MW) Stable Outlook

Rating Rationale

NICO General Malawi’s rating reflects the insurer’s strong financial profile, supported by good earnings, sound capitalisation and adequate liquidity as well as a fairly robust business profile

NICO General Malawi’s business profile is supported by a strong competitive position but partly offset by intermediate premium diversification. The insurer is the market leader in Malawi, accounting for 35% of short-term insurance industry gross premiums in FY19, with a relative market share of 4x. The insurer’s very strong market position is viewed to be underpinned by strong broker relationships and relatively fair reach in the market through direct sales and agents, while its association with Sanlam Pan Africa further strengthens its brand and systems. NICO General Malawi displays an intermediate level of premium diversification, with three material lines of business on a gross and net basis. Product risk is viewed to be low, reflecting moderation of fire and accident risks by the motor portfolio. Going forward, premium diversification is expected to measure within a similar range, albeit with some focus on engineering business potentially supporting enhanced diversification.

NICO General Malawi’s earnings remain strong supported by an efficient cost structure. The insurer registered an improved net incurred loss ratio of 46% at FY19 (FY18: 54%), with underwriting profitability further supported by a lower cost base, having registered a total expense ratio of 17% (FY18: 25%). The latter was largely a function of continued high scale efficiencies and commission recoveries from the fire portfolio, which are expected to persist over the outlook period. In this respect, the underwriting margin is projected to rise above the review year level of 13%. The reduction in interest rates in Malawi could however moderate investment income, potentially lowering net earnings. However, the earnings assessment is expected to remain within the current range over the medium term, cemented by competitive underwriting profit drivers.

The insurer’s capitalisation remains strong as evidenced by a GCR capital adequacy ratio (“CAR”) of 2.0x, supported by moderate underwriting risk and fairly prudent exposures to market and counterparty risks. Underwriting risk exposures have been maintained at fairly conservative levels over the review period, while high risk asset exposure was largely limited to listed equities, which measured at 22% of capital at FY19. Going forward, GCR expects risk adjusted capitalisation to be managed within a strong range over the rating horizon, given a level of consistency in capital management.

Liquidity has been maintained within a moderate range over the review period, amidst relatively strong premium growth and highly volatile credit conditions in the market. Net technical liabilities coverage improved to 1.7x at FY19 (FY18: 1.6x) while coverage of operational requirements was at 15 months from 12 months in the previous period, due to disciplined claims management. Liquidity pressures could increase over the medium term should recent claims improvements be reversed and credit pressures stemming from the operating environment persist.

The credit profile of NICO General Malawi is moderated by GCR’s assessment of wider risks at NICO Holdings Limited (“the group”), which reflects relatively lower capitalisation and liquidity.

Outlook Statement

The Stable Outlook reflects GCR’s view of a stable risk profile for the wider group, as well as consistently strong earnings performance and capitalisation at company level, pointing to relative stability in sensitive credit factors. The underwriting margin is expected to be maintained above 10% and GCR CAR is expected to register at around 1.9x over the outlook horizon.

Rating Triggers

An improvement in GCR’s assessment of the group’s credit profile could benefit the rating, especially should the group’s capitalisation and liquidity strengthen from current levels. Conversely, negative rating pressure could result from a deterioration in the group’s credit profile or material deterioration in the company’s earnings that in turn adversely impacts capitalisation or liquidity.

Analytical Contacts

Primary analyst Victor Matsilele Analyst: Insurance Ratings
Johannesburg, ZA VictorM@GCRratings.com +27 11 784 1771
Committee chair Susan Hawthorne Senior Analyst: Insurance Ratings
Johannesburg, ZA SusanH@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, May 2020
GCR Insurance Sector Risk Scores, July 2020

Ratings History

NICO General Malawi

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National AA-(MW) Stable Outlook May 2008
Financial strength Last National AA(MW) Stable Outlook November 2019

Risk Score Summary

Rating components and factors Risk score
Operating environment 4.25
Country risk score 1.50
Sector risk score 2.75
Business profile 0.25
Competitive position 1.25
Premium diversification (1.00)
Management and governance 0.00
Financial profile 2.25
Earnings 1.25
Capitalisation 1.00
Liquidity 0.00
Comparative profile (0.75)
Group support (0.75)
Government support 0.00
Peer analysis 0.00
Total score 6.00

Glossary

Capitalisation The provision of capital for a company, or the conversion of income or assets into capital.
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.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.

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 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 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 from the entity and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2019;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements to December 2020;
  • Unaudited interim results to 30 September 2020;
  • Reinsurance cover notes for 2020; and
  • Other relevant documents.
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