Announcements Insurance Rating Alerts

GCR affirms Western National SA’s national scale financial strength rating of A(ZA), Outlook Stable

Rating action

Johannesburg, 10 December 2020 – GCR Ratings (“GCR”) has affirmed Western National Insurance Company Limited’s (“Western National SA”) national scale financial strength rating of A(ZA), with a Stable Outlook.

Rated entity / Issue Rating class Rating scale Rating Outlook/Watch
Western National Insurance Company Limited Financial strength National A(ZA) Stable Outlook

Rating rationale

Western National SA’s rating reflects the strengths and weaknesses of Western Group Holdings Limited (“WGHL” or “the group”), as the insurer is viewed to be the core operating entity within the group. In this regard, the rating balances the group’s sound financial profile with a moderate business profile.

Risk adjusted capitalisation is viewed to be strong and supportive of the rating. The GCR Capital Adequacy Ratio (“CAR”) has been maintained above 1.7x over the past two years, while Western National SA reported Solvency Capital Requirement (“SCR”) coverage of 1.9x at 4M F21 (FY20: 1.8x). Liquidity has remained at strengthened levels, with stressed investments coverage of technical reserves registering above 1.8x between FY19 and 5M F21, supported by healthy operational cash flow generation. We expect both capitalisation and liquidity to remain within similar ranges over the outlook horizon, supported by healthy earnings.

WGHL has reflected a strengthening underwriting performance trend over the review period, underpinned by consistent improvements in the net loss ratio. Furthermore, the group benefitted from improved scale efficiencies and lower net acquisition costs in FY20, underpinning an increase in the underwriting margin to 13% versus a prior three-year average of 7%. This was nevertheless moderated by a reduced average investment yield, with return on revenue equating to a stable and relatively healthy 11% in FY20 and 5M F21.

The above factors are partly offset by the group’s limited competitive position, given low market shares in the South African and Namibian insurance sectors, and the start-up phase of the Botswana businesses. Premium diversification is viewed to be moderate in terms of line of business spread, and the assessment also considers limited geographic diversification outside of South Africa. The group has reflected a level of success in executing its strategic plans, as evidenced by the strong growth achieved over the review period, which has coincided with a strengthening in underwriting profitability. This, together with potential for enhanced diversification through expansion into Botswana, may support a positive assessment of the business profile if sustained over the medium term.

The rating considers the overall risk profile of the majority shareholder, PSG Konsult Limited, which was reviewed in July 2020 and the rating announcement can be found at https://gcrratings.com/announcements/gcr-affirms-psg-konsult-limiteds-south-african-issuer-rating-of-aza-on-the-back-of-sustained-balance-sheet-strength-outlook-stable/.

Outlook statement

GCR expects cross cycle earnings to remain sound, supporting GCR CAR and liquidity metrics at similar levels over the outlook horizon. As a result, the group’s standalone credit profile is likely to be maintained at similar levels, with potential for a longer term strengthening on the back of successful execution of the expansion and diversification strategy.

Rating triggers

Positive rating action may be limited by the consideration of group dynamics given the shareholding structure. Negative rating action could follow if earnings register below expectations and this is accompanied by a reduction in capitalisation and/or liquidity.

Analytical contacts

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, November 2020
GCR Insurance Sector Risk Scores, July 2020

Ratings history

Western National Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(ZA) Stable Outlook April 2015
Financial strength Last National A(ZA) Stable Outlook February 2020

Risk score summary

Rating components and factors Risk score
Operating environment 14.75
Country risk score 7.00
Sector risk score 7.75
Business profile (3.00)
Competitive position (2.25)
Premium diversification (0.75)
Management and governance 0.00
Financial profile 2.00
Earnings 0.50
Capitalisation 1.00
Liquidity 0.50
Comparative profile (0.25)
Group cap (0.25)
Government support 0.00
Peer analysis 0.00
Total score 13.50

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
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.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Claim 1. A request for payment of a loss, which may come under the terms of an insurance contract (insurance). 2. A formal request or demand (corporate finance).
Country Risk The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.
Coverage The scope of the protection provided under a contract of insurance.
Credit A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company
Diversification Spreading risk by constructing a portfolio that contains different exposures 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.
Environment The surroundings or conditions in which an entity operates (Economic, Financial, Natural).
Insurance Provides protection against a possible eventuality.
Investment Yield Measures the investment return achieved relative to funds invested in financial instruments, excluding unrealised gains/losses.
Investment Yield Measures the investment return achieved relative to funds invested in financial instruments, including unrealised gains/losses.
Issuer The party indebted or the person making repayments for its borrowings.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. 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.
Loss 1. A tangible or intangible, financial or non-financial loss of economic value. 2. The happening of the event for which insurance pays (insurance).
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Net Loss The amount of loss sustained by an insurer after giving effect to all applicable reinsurance, salvage, and subrogation recoveries.
Offset A right (Right of Offset) to set liabilities against assets in any dispute over claims.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
Reserves A portion of funds allocated for an eventuality.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Senior A security that has a higher repayment priority than junior securities.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.
Spread The interest rate that is paid in addition to the reference rate for debt securities.
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.
Yield Percentage return on an investment or security, usually calculated at an annual rate.

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 was based solely on the merits of rated entity, security or financial instrument being rated; and c.) such rating was 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 above 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 financial results as at 29 February 2020;
  • Four years of comparative audited financial statements to February;
  • Unaudited management accounts to 31 July 2020;
  • Other relevant documents.
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