Announcements

GCR affirms Western National Insurance Company Limited’s rating of A-(ZA); Outlook Stable

Johannesburg, 31 May 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Western National Insurance Company Limited at A-(ZA), with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Western National Insurance Company Limited (“Western National SA”) based on the following key criteria:

The insurer reflects moderately strong risk adjusted capital adequacy, underpinned by well managed insurance risks and relatively limited investment exposure. Capital has been buoyed by sound profitability, as well as capital injections to support the insurer’s medium term growth strategy. In GCR’s view, capital commitments made by the ultimate shareholders to meet growth related requirements afford the insurer a degree of financial flexibility. As such, GCR expects the insurer to remain sufficiently capitalised relative to expected solvency assessment and management (“SAM”) parameters, supported by the explicit capital management strategy in place, with the insurer targeting SCR cover of 1.3x.

Cash holdings increased substantially over the last three years, on the back of sound operating cash flows, as well as capital injections. As such, liquidity metrics registered at strong levels, with cash covering net technical liabilities by 1.4x (FYE15: 1.6x), while the claims cash coverage ratio equated to a relatively stable 9 months (FY15: 10 months). GCR expects liquidity metrics to remain within a strong range, underpinned by the insurer’s conservative investment strategy.

Western National SA registered sound levels of underwriting profitability, underpinned by a competitive cost structure offsetting a relatively elevated loss ratio compared to peers. As such, the two year average underwriting margin equated to 6% (peer average: -1%). Going forward, GCR expects Western National SA’s medium term earnings capacity to remain within a sound range, supported by the competitive cost structure, and provided the insurer strengthens claims management processes, while adhering to strict underwriting principles.

Reinsurance arrangements are largely placed with highly rated counterparties, with the highest net retention per risk and event limited to levels viewed to be conservative.

Western National SA’s competitive position remained modest, with the insurer registering 0.7% of the industry gross premiums in FY16 (FY15: 0.6%). The insurer’s business model centres on providing intermediated commercial motor and property business. While GCR expects the insurer to continue to achieve growth, note is taken of the strong competitive dynamics in the intermediated segment. As such, the ability to achieve growth targets, while maintaining profitability, remains a key rating consideration.

The business mix is heavily reliant on motor and property, given the insurer’s business model. As such, these two classes together accounted for 88% of gross premiums in FY16. Similarly, the risk base mirrors the business mix, with property and motor together representing 88% of net written premiums. Nevertheless, product risk, which evidenced an improvement over the last three years, is viewed to be moderately low.

The rating may be upgraded following a substantial strengthening in the insurer’s business profile (by way of increased market share with enhanced earnings diversification), while all other credit protection metrics are maintained within a strong and/or moderately strong range. Conversely a downgrade could result from a persistent deterioration in the underwriting result coupled with capital adequacy contracting below adequate levels on a sustained basis.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (April 2015)    
Claims paying ability: A-(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Yvonne Masiku   Susan Hawthorne
Senior Credit Analyst   Senior Credit Analyst
(011) 784-1771   (011) 784-1771
ymasiku@globalratings.net   susanh@globalratings.net
     
Committee Chairperson    
Marc Chadwick    
Sector Head: Insurance    
(011) 784-1771    
chadwick@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2015.

Western National SA report 2015.

RSA Short Term Insurance Bulletins, 2001-2015.

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. 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Accounting A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
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.
Capital Base The issued capital of a company, plus reserves and retained profits.
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.
Credit Rating Agency An entity that provides credit rating services.
Creditworthiness An assessment of a debtor’s ability to meet debt obligations.
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.
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.
Interest Money paid for the use of money.
Liquidity The speed at which assets can be converted to cash.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
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”) The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
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
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).
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued.
Securities Various instruments used in the capital market to raise funds.
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.

For a more detailed glossary of terms/acronyms used as per GCR insurance glossary, please click here

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Western National Insurance Company Limited 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 rating has been disclosed to Western National Insurance Company Limited with no contestation of the rating.

The information received from Western National Insurance Company Limited and other reliable third parties to accord the credit rating included:

• The 2015 audited annual financial statement,

• The draft accounts for 2016,

• Four years of audited comparative numbers,

• Full year detailed budget financial statements for 2017,

• The ST returns for 2015,

• The current year reinsurance summary cover notes, and

• Other related documents.

The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.

GCR affirms Western National Insurance Company Limited’s rating of A-(ZA); Outlook Stable

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