Johannesburg, 31 May 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Western National Insurance Company Limited of A(ZA), with the rating 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:
Western National SA’s earnings capacity has been sustained at a strong level over the last three years, supported by consistent attainment of positive underwriting results and sound investment returns. In this regard, the three year underwriting margin averaged a healthy 8% (two-year average: 9%), while the return on equity averaged 21% over the corresponding period. The favourable underwriting trend has been a function of an improving claims ratio, offsetting an uptick in the cost structure (given higher underwriting management agency profit commission payments). In this regard, the two year average net incurred loss ratio equated to 65%, which compares favourably to the prior two year cycle of 73%. Going forward, the disciplined underwriting approach is expected to continue, with the claims ratio budgeted at a lower 64% for FY19, while the underwriting margin is forecast to stabilise within a range of 7-9%, supporting strong forward looking earnings capacity.
Risk adjusted capitalisation continued to trend within a strong range, with the Solvency Capital Requirement (“SCR”) maintained comfortably above the insurer’s internal target of 1.3x. In this regard, the insurer has benefited from a full profit retention strategy, with increasing NPAT serving to sustain strong risk adjusted capitalisation, catering for aggressive growth within the risk base. While management expects premium growth to remain robust, the continuation of favourable profit trends is likely to preserve SCR coverage above the internal target range, conducive to a strong medium term capitalisation assessment. Furthermore, the highest net retention per risk and event are limited to levels viewed to be conservative relative to capital, while the reinsurance panel reflects strong aggregated credit strength.
Liquidity was maintained at a strong level, with cash coverage of net technical liabilities equating to a stable 1.7x at FY18. The insurer reflects a fairly well balanced investment portfolio, with cash and equivalents representing 57% of the total, while the remainder is housed in relatively tradable collective investment schemes, providing additional liquidity support. A consistent investment approach, coupled with continued strong operational cash flow generation is likely to see liquidity maintained within a strong range going forward.
Western National SA’s premium base remains limited relative to the short term industry, comprising 0.8% of total estimated industry GWP at FY18. This, coupled with revenue concentration in two business lines, limits the insurer’s business profile. However, the insurer continues to make strides in improving its competitive position and earnings profile, with strong premium growth in non-core portfolios driving the improvement which, if sustained, could result in an enhanced factor assessment over the medium to long term.
The rating may be upgraded if the insurer’s business profile strengthens (by way of increased market share with enhanced earnings diversification). This would need to be supported by key credit protection measures registering within strong ranges. Conversely a downgrade could result from a persistent deterioration in the underwriting result coupled with capital adequacy and/or liquidity contracting below adequate levels on a sustained basis.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2015)|
|Claims paying ability: A-(ZA)|
|Last rating (May 2017)|
|Claims paying ability: A(ZA)|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Western National SA rating reports, 2015-2017
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.
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 2017 audited annual financial statements 4 years of comparative audited numbers
- Unaudited draft accounts for 2018
- Budgeted financial statements for 2019
- The current year reinsurance cover notes
- 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|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.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|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.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Net Incurred Loss||The total amount of paid claims and loss reserves associated with a particular time period, less the reinsurance portion.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Profit Commission||A provision found in some insurance agreements, which provides for profit sharing. A commission that is payable according to a pre-determined formula as an incentive and reward for profitable underwriting.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|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.|
|Underwriting Result||The profit or loss that an insurer derives from providing insurance or reinsurance coverage, exclusive of investment income and other income.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.|
For a detailed glossary of terms please click here
GCR affirms Western National Insurance Company Limited’s rating of A(ZA); Outlook Stable.