Johannesburg, 30 July 2021 – GCR Ratings (“GCR”) has affirmed NSIA Insurance Company Limited’s (“NSIA Insurance”) national scale financial strength rating of A-(GH), with the Outlook maintained as Stable.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|NSIA Insurance Company Limited||Financial strength||National||A-(GH)||Stable Outlook|
NSIA Insurance’s rating balances very strong risk adjusted capitalisation and liquidity with limitations in underwriting performance and business profile. The rating derives uplift from NSIA Participations S.A., a majority shareholder in NSIA Insurance, given evidence of strategic and operational integration, as well as history of support.
NSIA Insurance has a very low market share of around 1%, and limited premium scale of less than USD5m. Furthermore, the insurer’s premium diversification is considered to be limited, with a high concentration to the motor class on a gross and net basis. Going forward, we expect organic growth targets to potentially be enhanced by the introduction of additional mandatory insurance lines that could contribute towards improved scale and diversification over the medium to longer term.
Earnings are viewed to be credit negative, impacted by low premium scale which contributed towards a high (albeit improved) operating expense ratio, limiting upside potential from fairly low claims experience. As a result, the five-year average underwriting margin equated to -40% in FY20 and is expected to remain quite deeply negative over the outlook horizon. Nevertheless, consistent with industry norms, NSIA Insurance benefits from sound investment yields, supporting a five year average net margin of 13% in FY20. We expect similar dynamics to play out over the outlook horizon, although with a potentially improving underwriting trend stemming from continued growth.
Risk adjusted capitalisation has been maintained at very strong levels, with the GCR capital adequacy ratio (“CAR”) registering above 3x over the past four years, supported by healthy internal capital generation and low exposure to underwriting and market risks. However, the company’s capital base remains below the new regulatory minimum requirement of GHS50m, with the deadline for meeting this requirement being January 2022. We nevertheless note the plans that are in place to meet the minimum requirement in the coming months.
Very strong liquidity is also a credit positive, with the liquidity coverage ratio continuing to exceed 3x and operational cash coverage being close to two years at FY20. Consistently, conservative investment allocations and positive operational cash flow generation are expected to preserve a very strong liquidity buffer over the outlook horizon, despite high growth targets.
GCR expects net earnings to continue to support very strong risk adjusted capitalisation and liquidity, while the planned increase in capitalisation is likely to position the insurer for higher growth targets. The business profile is likely to continue to be weighed down by limited scale relative to stronger competitors, although planned strategic initiatives could contribute towards enhanced competitiveness and diversification if successfully executed.
Upward rating action could follow an improvement in the business profile that supports a sustained strengthening in earnings and continued strength in balance sheet metrics. In contrast, the rating could be downgraded if there is a weakening in risk adjusted capitalisation or liquidity, with respective coverage metrics reducing below 2.5x. Furthermore, negative rating action could follow if the insurer does not recapitalise sufficiently ahead of the January 2022 deadline, and we view this to result in regulatory risk.
|Primary analyst||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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, April 2021|
NSIA Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial strength||Initial*||National||BBB+(GH)||Stable Outlook||September 2018|
|Last||National||A-(GH)||Stable Outlook||July 2020|
*Formerly claims paying ability.
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||3.50|
|Sector risk score||4.25|
|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;
- Budgeted financial statements to 31 December 2021
- Unaudited management accounts to 31 May 2021;
- Other relevant documents