Announcements

GCR affirms Nouvelle Compagnie Africaine de Reassurance’s rating of BBB-(CI); Outlook Negative.

Johannesburg, 22 December 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Nouvelle Compagnie Africaine de Reassurance of BBB-(CI), with the outlook accorded as Negative. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Nouvelle Compagnie Africaine de Reassurance of B, with the outlook accorded as Negative. The ratings are valid until November 2018.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Nouvelle Compagnie Africaine de Reassurance (“NCA Re”) based on the following key criteria:

The ratings of NCA Re have been placed on Negative outlook due to a fast paced increase in premiums receivable aged above 180 days (9M FY17: XOF9.2bn; FY16: XOF5.9bn; FY15: XOF4.8bn), with the potential increase over the rating horizon likely to depress capital adequacy to very limited levels.

While liquidity was maintained at sound levels amidst the continued accumulation of aged premiums receivable, risks to sustained factor strength are viewed to be high in the absence of a consistent profit stream from operations (adequately adjusted for premiums aged above 180 days). As such, high liquidity metrics, a function of the relief offered by stretched payables and a conservative investment strategy geared towards liquid assets, are viewed to be somewhat distorted by the rapid increase in other current liabilities. Furthermore, liquidity metrics remain sensitive to the negative impact of dividend distributions (two year average payout: 52%) on a developing credit profile, compounding aforesaid risks. In this respect, liquidity could register within a lower range over the medium term, in the absence of drastic measures to contain credit risk.

Capital adequacy is assessed at weak levels, owing to the high quantum of aged premiums receivable. In this regard, the international solvency margin lowered from a nominal 79% to a limited 26% after adjusting capital for premiums receivable in excess of 180 days. Accordingly, the projected positive impact from the planned increase in issued capital to a regulatory minimum of XOF10bn (FY16: XOF7bn) ahead of the 2020 deadline, may be offset by continued growth in aged premiums receivable balances, representing a key risk to the ratings.

Earnings capacity is viewed to be weak, and a source of negative ratings pressure. GCR’s view of weak earnings stems primarily from high premiums receivable impairments, which materially constrain profit generation. Inclusive of GCR’s adjusted premiums receivable provisions, the reinsurer would have registered a cumulative bottom line loss over the past three years (XOF1.3bn; FY16: XOF239m loss). The lack of enhancements to credit controls and premium collection is likely to see this trend persist, representing an ongoing source of heightened earnings risk.

Business concentration remained moderate in FY16, with two lines of business contributing materially to both gross and net premiums. Going forward, relatively stable revenue sourcing arrangements are likely to limit changes in the business mix, with further support to the business profile expected to stem from a healthy level of geographic diversification.

The retrocession programme is largely placed with multiple reinsurers of intermediate aggregate credit strength, with maximum exposure per risk and event measuring at a conservative 1% of FY16 capital.

Measures to address capital pressures that match or exceed the developing increase in aged premiums receivable may result in the rating outlook reverting to stable. Conversely, the ratings may be downgraded if aged premiums receivable increase above current levels, resulting in a reduction in risk adjusted capitalisation and/or liquidity.

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATINGS HISTORY
   
Initial/ last rating (March 2017) Initial/ last rating (March 2017)
Claims paying ability: BBB-(CI) Claims paying ability: B
Outlook: Stable Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Godfrey Chingono
Credit Analyst
(011) 784 – 1771
godfreyc@globalratings.net

Committee Chairperson
Yvonne Mujuru
Sector Head: Insurance Ratings
(011) 784 – 1771
ymujuru@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2017

Criterial for Rating Newly Established and Start-Up Insurance Companies, updated July 2017

Nouvelle Compagnie Africaine de Reassurances rating report, 2016

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/RATING-SCALES-DEFINITIONS. 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.

Nouvelle Compagnie Africaine de Reassurances 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, and contested by Nouvelle Compagnie Africaine de Reassurances with no change to the ratings decision.

The information received from Nouvelle Compagnie Africaine de Reassurances and other reliable third parties to accord the credit ratings included:

  • Audited annual financial statements to 31 December 2016
  • Four years of comparative audited numbers
  • Budgeted financial statements for 2017
  • The current year retrocession cover notes, and
  • 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

Capacity The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.
Capital The sum of money that is invested to generate proceeds.
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.
Distribution Channel The method utilised by the insurance company to sell its products to policyholders.
Enterprise Risk Management ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.
International Scale Rating (“ISR”) International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
Intermediary A third party in the sale and administration of insurance products.
Interest Money paid for the use of money.
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.
Market Risk Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.
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.
Policyholder The person in actual possession of an insurance policy.
Portfolio All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.
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.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
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.
Statutory Required by or having to do with law or statute.
Subordinated Debt Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.
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.

For a more detailed glossary of terms, please click here

GCR affirms Nouvelle Compagnie Africaine de Reassurance’s rating of BBB-(CI); Outlook Negative.

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